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By Eric Moskowitz
Staff Reporter
7/2/98 10:27 AM ET
Semiconductor investors are getting antsy. "It's been too long," they say, as they watch all those gleeful Internet investors get rich -- and then richer. Since last August, the Hambrecht & Quist Internet index has soared 96%, while the Philadelphia Stock Exchange Semiconductor Index (SOX) has plunged 37%. Semis got a boost from analysts earlier this year when many of them determined that the Asian problem was over, but that all ended when nearly every company in the industry preannounced before the March-quarter earnings period. So much for the analysts.
Well, almost all the analysts. Merrill Lynch's Thomas Kurlak -- long the industry's ax -- has bounced the sector like an artfully played yo-yo. After he hinted in a June 16 report that investors may want to start building their investment positions for 1999, anxious investors bought up stock immediately, pushing the SOX 7.5% higher over the past two weeks. Tuesday morning, however, Kurlak took a step back, saying that the upcoming second quarter would be weaker still, as prices continue to plummet. "The steepest part of the semiconductor slowdown has begun and is currently trending downward," he told clients. The SOX was down more than 4 points, or 1.7%, to 245.93 in trading Tuesday, although it rebounded 2.8% yesterday.
When we looked last month, the outlook for the semi sector wasn't great. Since then, it's become downright bleak.
Semiconductor bookings, which have been declining every month this year, are now down 56% since July of last year, says Dan Hutchenson, who tracks semi equipment stocks for VLSI Research. He notes that while billings are up, bookings are way off -- and that's a pretty grim statistic. "The only worse time I can remember is when bookings were down 90% over a four-quarter period in 1985," says Hutchenson. "Second-quarter earnings are going to be bloody."
Analyst James Barlage of Salomon Smith Barney also finds it hard to muster much confidence about the group's near-term prospects. He estimates that the worldwide semiconductor market will contract by 7% in 1998, but he does look for a resumption of revenue growth in the fourth quarter of this year. "Although considerable uncertainty continues to exist regarding Asia-Pacific and Japan, if these regions don't weaken further ... we could see a bottoming of semiconductor shipments this summer." Not exactly bursting with confidence, is he?
Jim Burkart, a semiconductor and hardware analyst with Chicago-based money manager Northern Trust, is trying to look at the positives, but "the only bright side is that PC inventories seem to have pretty much been depleted." This means that the big box makers, such as Compaq (CPQ:NYSE), have been slashing prices simply to get the machines off their shelves. The tactic has worked: Industry observers believe the No. 1 PC manufacturer has reduced its inventory channel from 10 weeks earlier in the year to around four recently.
Even so, analysts must be growing weary of rescheduling their estimates of the group's turnaround. Last fall, most were looking for a resurgence in orders by this spring. That's since been pushed back to the end of 1998, with Kurlak pointing to December as "the pivotal month" for the sector.
Morgan Stanley Dean Witter analyst Mark Edelstone remains upbeat, in spite of having had to postpone his bullish Intel (INTC:Nasdaq) scenario by several months. "We continue to believe that industry fundamentals will improve in the second half of the year," says Edelstone, who slapped a strong buy rating (and a 110 price target) on Intel April 15. Though the analyst believes the industrywide PC inventory correction will end shortly, sending Intel on a sharp rebound, the stock is currently trading at 74, no higher than it was when he upgraded the bellwether chip maker. (His firm has participated in one of the company's recent public offerings.)
It may not be exactly confidence-inspiring to watch the world's smartest analysts struggle to pin down a date for the recovery, but if they don't have a clue, what chance does the average investor stand?
Northern Trust's Burkart -- who maintains a buy on a number of semiconductor stocks as long-term "core" holdings -- adds that he does not expect to hear a lot of upbeat remarks during the June-quarter conference calls: "We still have a serious oversupply in DRAMs and memory prices, so we're not looking for a turnaround this quarter."
Dean McCarron, principal of Mercury Research, a Scottsdale, Ariz.-based tech research firm, echoes these thoughts and goes one step further. "All this weak market activity shows that we are in the midst of another down cycle." The last down cycle in the industry was from 1994 to 1996, he says, due to memory-chip pricing-related concerns. McCarron, who has been following the sector since 1986, reminds investors that these down cycles can last anywhere from three quarters to two years. And for those thinking that we're at least past the halfway mark, McCarron has a sobering thought. He believes that this current cycle began in the first quarter of this year -- and not back when the semi stocks first started dropping last August. Uh-oh.
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While earnings estimates are way down over last year, it's taken analysts almost a full year to realize the extent of the damage done by a combination of intense competition, excess supply and heavy pricing pressure in the industry. Oh, and don't forget a full-scale bout of the Asian contagion. No matter what happens, look for a lively round of conference calls in coming weeks.
Here's a quick rundown of some of the more important companies reporting (along with each company's earnings announcement date):
Advanced Micro Devices (AMD:NYSE) reports after the close July 8. Analysts expect the company to report a loss of 18 cents per share, reversing a profit of 7 cents per share in its year-ago June quarter, according to First Call. "It's been pretty quiet at AMD and they haven't preannounced, so I'm a little concerned," says McCarron. "With Intel lowering prices on many of their chips, however, it has forced AMD, Cyrix [a subsidiary of National Semiconductor (NSM:NYSE)] and IBM [IBM:NYSE] to lower chip prices as well."
Intel reports after the close July 14. The company already preannounced that its earnings would be affected by declining chip and PC prices. Analyst consensus estimates call for Intel to earn 68 cents per share, down 26% from its year-ago quarter total of 92 cents per share. TSC will have a preview of the earnings announcement a day before.
Altera (ALTR:Nasdaq) reports after the close July 15. For what it's worth, both Barlage and Edelstone have strong buys on the stock and did not participate in any of the company's recent public offerings. Maybe it's because the company is expected to report June-quarter earnings of 38 cents per share, only 5% shy of year-ago quarter earnings of 40 cents.
Novellus Systems (NVLS:Nasdaq) reports second-quarter earnings at 11 a.m. EDT July 16. Analysts' estimates call for the chip-equipment maker to earn 46 cents per share, versus 50 cents in its year-ago quarter. Although earnings have slipped, analysts have been stamping buy ratings on this company because of its low price-to-earnings ratio (only 18 times 1998 earnings) and its 61% increase in net sales last quarter.
Since the end of Xilinx's (XLNX:Nasdaq) fiscal year in March, the stock has lost 20% of its value. The cause? Revenue and earnings have been flat for the last four quarters, and analysts now estimate the San Jose-based chip-equipment company will earn 36 cents per share versus 41 cents in its year-ago first quarter. Xilinx reports after the close July 16.
Texas Instruments (TXN:NYSE), which recently sold its unprofitable memory business to Micron Technology (MU:NYSE) for $800 million, reports before the open July 21. Analysts expect second-quarter earnings of 37 cents per share versus 54 cents in its year-ago quarter. One disturbing trend: Analysts have ratcheted their numbers down from 44 cents -- nearly 16% -- in just five weeks. "There just has been a huge falloff in shipments across the board," says VLSI's Hutchenson. "And that's not exactly a positive sign."
KLA-Tencor (KLAC:Nasdaq) reports its fourth-quarter earnings before the open on July 28, but much of the mystery has been taken out of this semi equipment's earnings announcement. On Wednesday evening, the company preannounced, saying that many expected bookings failed to materialize by the close of the quarter, especially from Taiwan. Morgan Stanley analyst Jay Deahna says that KLAC was expected to record a positive book-to-bill ratio (over 1.0), but now he expects it to record one in the 0.90 to 0.95 range. "We expect a tremendous amount of negative news flow on the semiconductor capital spending front and from the semiconductor capital equipment industry as SemiconWest and earnings season unfold over the next month," Deahna -- who has an outperform rating on KLA-Tencor -- told clients.
Applied Materials (AMAT:Nasdaq) doesn't report until Aug. 11, after the close. But it's still a noteworthy event because Applied Materials is the out-and-out chip-making equipment leader, and its third-quarter earnings conference call will be widely listened to. If management talks up expectations, it would give a big boost to the struggling semis. Analysts estimate that Applied will earn 21 cents per share in its third quarter, down from 39 cents per share in its year-ago quarter. While most of the chip-equipment sector is struggling to maintain growth rates, Applied has seen its order book continue to swell. In its first two quarters, the company showed revenue increases of 57% and 30%, respectively. |
