10:44am EDT 7-Aug-98 Lehman Brothers (M. A. Gumport, CFA 1(212)526-5368) ALSC
Semiconductors: Upgrading Ratings on CUBE, ALSC, INTC, AMD
Today's Date : 08/07/98
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* The Bottom -- June SIA data 10% better than expected. More DRAM price
upticks. Reports of better SRAM volume from telecom/datacom customers.
Intel sees inventory correction on track. IC Unit Volume Growth Turning
Point.
* Upgrading Ratings on C-Cube Microsystems (CUBE - 16 11/16) to 1 Buy from 2
Outperform; Alliance Semiconductor (ALSC - 2 11/16) to 1 Buy from 2
Outperform; Intel (INTC - 87) to 2 Outperform from 3 Neutral; and Advanced
Micro Devices (AMD - 16 3/4) to 2 Outperform from 3 Neutral.
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TRUE: WORST EVER STOCK PERFORMANCE. The S&P 400 has moved up 91% since
September 1995 but the average chip stock has moved down 31%, an 11-quarter
period in which chip stocks underperformed by 122 percentage points. In the
4Q73, 2Q76, and 4Q80 cycles, chip stocks dropped about 50% during six
quarters while the market declined 19%. Only the Great Chip Bear Market of
1983-1990 (when the market rose 99% but many chip stocks fell 40%) was as
bad.
TRUE: WORST EVER FUNDAMENTAL PERFORMANCE. With 1998 world chip sales headed
for a 10%-12% decline, 10-year average growth will fall to a record low 11%
(see our July 13, 1998 World Semiconductor Market: 1973-1997). The chip
industry has never suffered as deep and long a setback as in the double dip
decline of 1996-1998. THE "RULE OF 32" HAS BEEN BROKEN: In the 1975, 1981,
1985, and 1989 fundamental downturns, once growth had fallen 32% from peak
toward trend, chip sales rebounded. But in this cycle, we began 1998 already
down 37% from peak toward trend and look likely to end 1998 down 50%.
TRUE: RECORD LOW VALUATIONS. Seven of the 17 chip stocks we cover now trade
at record low relative multiples of book and sales (by far the most
consistent historical indicators of buying and selling points): Alliance
Semiconductor, Avnet (AVT - 54 ¬; rated 2), C-Cube Microsystems, Integrated
Device (IDTI - 6; rated 3), Ramtron International (RMTR - 2 13/32; rated 1),
STMicroelectronics (STM - 64; rated 1), Xilinx (XLNX - 41 1/32; rated 1).
Another two are within 10% of record lows: Lattis Semiconductor (LSCC - 30
9/16; rated 2) and Micron Technology (MU - 35; rated 2). With the exception
of Texas Instruments (TXN - 61 3/8; rated 1) -- the major company with the
most rapidly rising profit margins -- none is above the midpoint of the its
historical range.
TRUE? THE BOTTOM. We continue to expect a strong upturn in 4Q98 results for
chip makers based principally on large volumes of low priced ($399-$799),
ongoing telecom/data networking strength (most notably at Cisco; Lucent and
Alcatel are now also frequently mentioned and Nokia in the wireless space),
the emergence of DVD and cable data modems, and increased volume of digital
broadcasting. XDSL sales should begin, too, although high volume is a year
away. In a nutshell, growth drivers are shifting from high priced PCs to low
priced PCs and digital video (including, in digital video, tremendous
pressure on communications bandwidth). THE JUNE SEMICONDUCTOR INDUSTRY
ASSOCIATION (SIA) JUNE 1998 SALES DATA RELEASED AUGUST 4 SHOWED JUNE SALES
BETTER THAN EXPECTED, 22.3% ABOVE MAY VS. OUR +10% ESTIMATE. AS A RESULT, WE
RAISED OUR 1998 ANNUAL INDUSTRY SALES FORECAST TO ROUGHLY -11% (OLD: ABOUT -
14%). NOTABLY, DRAM BIT SHIPMENTS, DOWN 13% IN APRIL-MAY, REBOUNDED 30% IN
JUNE. June actually showed a small uptick in total IC unit volume year-over-
year growth from -1.1% in May to -0.1%. We still see a risk of one more
downdraft in year over year IC unit volume growth in July, but that data,
though not yet compiled, is already history. IN SHORT, WE BELIEVE CHIP UNIT
VOLUME GROWTH HAS BOTTOMED. The past three major chip stock turning points
have been marked by a turn in unit volume growth rates. Meanwhile, Micron
Technology has reported the return of Compaq and IBM to the market, DRAM
prices have been flat to up in recent weeks, reports are circulating of
improved SRAM sales at communications customers, and Intel is indicating
customer inventory corrections seem to be progressing on track.
ANOTHER BIG STEP IN: UPGRADING C-CUBE MICROSYSTEMS, ALLIANCE SEMICONDUCTOR,
INTEL, ADVANCED MICRO DEVICES. We continue to feel we already own the right
names. Vitesse Semiconductor (VTSS - 34 «; rated 1)is our single best story.
Among smaller cap issues, Xilinx still lacks momentum, but it is
exceptionally well positioned (high margins) and, we believe, will retake
market share. Among big cap stocks, Texas Instruments will have by far the
best margin improvement in the next year, and STMicroelectronics is by far
the best long-term story of consistent outperformance. We believe venture
situation RMTR will get back on course over the next nine months. In the
past eight weeks we have twice upgraded Micron Technology (memory coming back
into balance between September and April; better pricing evident now) and
once upgraded Alliance (value story). We are now upgrading C-Cube from 2 to
1. While 3Q EPS still looks sequentially flat/down, C-Cube is the key
beneficiary of the upcoming digital video wave with the leadership in
broadcast compression engines and future leadership in low cost
encoder/decoders. We continue to see the chance of a major order from
DirecTV. We also are upgrading Alliance from 2 to 1 on the basis of value.
And, while our long-term thesis on changes in the x86 market is totally
unchanged (a shift to low priced devices and increased competition), we are
upgrading both Intel and Advanced Micro Devices. Intel in particular seems
to see business progressing as expected toward a good 4Q upturn. |
