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Politics : Formerly About Applied Materials -- Ignore unavailable to you. Want to Upgrade?

To: blake_paterson who wrote (25937)	11/3/1998 11:48:00 AM
From: Jeffrey D	Read Replies (3) \| Respond to of 70976

To all: Portion of H&Q analysis of semi equip.industry. Short AMAT at your own financial risk. Jeff <<** Hambrecht & Quist Hambrecht & Quist Hambrecht & Quist ** Industry: Semiconductor Capital Equipment Firm: Hambrecht & QuistDate: 11/3/98 Semiconductor Capital Equipment: Moving from the Gutter to the Curb. * We believe equipment orders picked up in October. In particular, we believe Intel has started ordering for deployment of 0.18 micron. We believe Intel is building out Ireland and Israel as well as expanding its facility in Chandler, Arizona. We also expect Micron to invest in its recently acquired fabs from Texas Instruments. Moreover, we expect other semiconductor companies to follow this lead. * We characterize this activity as a move from the gutter to the curb--but it is improvement nonetheless. * We continue to believe that recessions in the semiconductor industry are driven by supply. As an example, the DRAM market has declined by a (31%) CAGR over the last three years, from $41 billion in 1995 to an estimated $13.5 billion in 1998. At the same time, megabytes of DRAM consumed has grown at a rate of 90% over the same period of time. We believe a slowdown in demand has a smaller impact on the balance of supply and demand. * We believe a combination of two factors will slow the growth of supply. One is a lack of investment. The second is a slowdown in the rapid succession of die shrinks at the 0.18 micron process node. We believe that this will necessitate accelerated capacity additions in the second half of 1999 and 2000. * Over the last several weeks, the equipment stocks have moved dramatically off their bottoms. When we published The Value Perspective, the top picks in our universe were trading at 2-3 times book value and 1.4-2 times trailing revenues. After appreciating 30%-50% they are trading at 2.7-4 times book value and 2.3-3.1 times trailing sales. The valuations are not as compelling at current levels and we believe value investors are likely to move off to the sidelines. * We believe there continues to be significant risk in the macroeconomic environment. Examples of possible negative catalysts would be a banking crisis in China or a continued decline in consumer confidence in the United States. Either of these factors could trigger a sell-off. * We believe the stocks are trading at the high end of their range and would use market weakness to accumulate the highest quality equipment names and we would not recommend paying up for equipment stocks at this juncture. We reiterate our Buy-on-weakness theme which we have emphasized all year. Our favorite names continue to be Novellus Systems, KLA-Tencor, Applied Materials, and ATMI.Introduction Since we published our last piece, Semiconductor Equipment: The Value Perspective, picks in our equipment universe have appreciated 30%-50% in the last 5 weeks. Given the rapid change in sentiment and valuations, we believe it would be helpful to provide investors some data points on the sector as well as an analysis of supply and demand.Equipment Bookings Activity Orders for capital equipment clearly picked up in the month of October. In the beginning of the year, we had anticipated that Intel would start ordering for 0.18 micron equipment in the summer. By the end of September, orders for equipment from Intel were still anemic. However, we believe that Intel has now stepped up orders for equipment. We believe that the company is upgrading its fab in Ireland and building out the shell in Israel (which had been on hold); and we expect Intel to expand its fab in Chandler, Arizona, for 0.18 micron. We believe that when all these orders are placed, they could amount to as much as $1 billion to $1.5 billion. In addition, Intel invested $500 million in Micron, which the DRAM maker will use, along with $750 million in financing from TI--to upgrade its newly acquired TI fabs. The spending from these two companies are the most significant because they are the leading suppliers in the two most important semiconductor segments, memory and microprocessors. We think the rest of the industry will follow their lead. Other companies are active as well. Samsung is building out the second phase of its Austin, Texas plant. There is also increased activity at AMD, NEC and TI. Activity is also increasing at Philips and STMicroelectronics. Finally, planning for new fabs has increased. During the summer, there were no new fabs on the drawing boards. Today there are two in the pipeline for production in 2000: the TSMC/Philips/Singapore joint venture and the IBM/Pacific Wire and Cable joint venture. In talking to industry veterans last week, it was clear things are better. However, demand was so bad in the summer, it is hard to imagine it getting worse. Demand for equipment is still at depressed levels. The fact that the number of new fabs being planned can be counted on one hand is not indicative of a robust environment. Moreover, front-end equipment bookings for September 1998 as reported by SEMI were $316 million down 24% sequentially and 71% year-over-year. This was the lowest level since March of 1993. Add to this the fact that several of the equipment suppliers are still downsizing and optimism becomes tempered rather quickly.>>