Silicon Valley
Oct 30, 1998
The Ax: Ax Notebook: The Semiconductor Industry Gets
Off the Canvas
By Eric Moskowitz and Medora Lee
Staff Reporters
Analysts covering semiconductor-equipment makers have had a humbling
12 months or so. Starting a few months after last fall's Asian-tinged retreat
in the industry, these analysts have called for industry comebacks just about
every month even as stock prices continued to head south.
Now the analysts are aiming more modestly to predict a bottom.
Exactly a year and a day after the Asian contagion hit Wall Street, there seems to be a consensus that the
semiconductor-equipment makers' problems -- led by excessive capacity cutting into capital spending --
are nearing an end.
"The first inflection point, the end to a deterioration in business, is evident on average throughout the
industry," wrote Credit Suisse First Boston's Elliott Rogers to clients this week. The second
inflection point, signifying an actual upturn, he said, could come as soon as 1999's first quarter. Rogers,
who is a newly minted 1998 Institutional Investor all-star, made a prescient warning in early July not to
re-enter semiconductor-equipment stocks.
Morgan Stanley's Jay Deahna, another 1998 all-star, points out that September's
semiconductor-equipment book-to-bill ratio was 0.57, flat with a revised number from August. "We
believe a bottom is forming in book-to-bill ratios," says Deahna. A ratio above 1 is a good sign for
semiconductor-equipment stocks; a ratio below 1 indicates that supply is still ahead of demand. For
example, in September 1997, the book-to-bill ratio, denoting the value of orders for each dollar of
equipment shipped, was 1.05, according to the Semiconductor Equipment and Materials
International.
Investors already are counting on better performance. The Philadelphia Stock Exchange's
semiconductor index is up 32% since Oct. 8, when the index hit a 52-week low. Semiconductor
companies, led by Intel (Nasdaq:INTC - news) , are also showing signs of life.
The Santa Clara, Calif.-based bellwether reported third-quarter earnings of 89 cents per share, 9 cents
above the consensus estimate, a boost to bullish Intel analysts such as Morgan Stanley's Mark Edelstone
and Piper Jaffray's Ashok Kumar. "We've absolutely seen a big turn in the industry after the second
quarter," says Edelstone, who says the second quarter was a bottom for semiconductor stocks. He adds
that the turn came "when we had a peak number of negative preannouncements and the highest negative
momentum in terms of revenues." Edelstone, along with Kumar, rates Intel a strong buy. (Piper Jaffray
hasn't participated in any of Intel's offerings. Morgan Stanley has participated in an underwriting of Intel
put options in the last three years.)
Merrill Lynch's Tom Kurlak -- who is slowly turning into a grizzly -- isn't giving up the fight,
however. After Intel reported, he told clients: "We estimate that orders are flattening recently, implying
a peaking of new order level entering the fourth quarter." He predicts Intel will earn 90 cents per share
in its December quarter, 8 cents below last year's figure and 4 cents below the early line.
Edelstone sees Intel earning 99 cents a share in its fourth quarter, but "I think there is an upside to that
number." Bears are worried that Intel will continue to lower PC chip prices to stay competitive with
Advanced Micro Devices (NYSE:AMD - news) , which will hurt earnings going forward. Edelstone
argues, however, that inventories are low, and demand is on the upswing, a factor that should outweigh
declining PC chip margins. If Intel reports a strong fourth quarter, this will be good news for
semiconductor-equipment stocks.
Laidley's Crystal Ball Works
Credit Suisse First Boston analyst Wendell Laidley was on the money Monday when he predicted that
Veritas Software (Nasdaq:VRTS - news) would announce a major deal after the close with a computer
vendor to allow Microsoft's (Nasdaq:MSFT - news) Windows NT to expand its customer base.
Veritas stock jumped to a three-week high on Monday in anticipation of the news. Veritas, a maker of
software that helps businesses manage data, said it had agreed with Dell (Nasdaq:DELL - news) to
bundle some of its products for Windows NT 4.0 and 5.0 into a wide range of Dell hardware servers and
storage.
Laidley says he sees this agreement as an opportunity for a broad base of customers to get a taste of
Veritas' software, which will eventually lead to further sales. He predicts this agreement will be the first
of many in the "very near term, which should collectively reinforce Veritas' emerging Windows NT
leadership position."
Laidley -- who maintained his 12-month stock target of 60, or 60 times 1999 estimated earnings per
share of $1 -- isn't sure how quickly Veritas' strategy will take hold, so he continues to rate Veritas a
buy, one peg below his firm's top rating of strong buy. CS First Boston has no underwriting relationship
with Veritas.
Veritas was still surging at Tuesday's close, trading up 1 1/8 at 49 3/8.
For more info on institutional holders of these stocks, as well as financial statements and earnings estimates, please see
the Thomson Company Reports.
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