I listened to the O'Neill presentation Neil. He is not as optimistic as others but still sees slow growth in 99.
I need to add three additional positives to the following article when I edit: the book to bill has turned, the dramatic increase in the sales of very very cheap PC's has begun to level off and customers are beginning to increase the purchase of higher priced machines with additional features, and Don's numbers look even more impressive at the end of this week.
Here is a draft my take written earlier this week, unedited:
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SEMI, SEMI-EQUIPMENT SECTORS SET FOR RECOVERY
By: Joe Dancy
The last five weeks have produced a gain of 66% for the 41-stock semiconductor equipment group followed by Don Wennerstrom. He notes that "the group was obviously oversold and when that rubber-band decided to snap back, it really 'moved out'. During the same period, the Philadelphia Semiconductor Index was up 45%."
The top 10 companies in the group Don follows are up 100% or more. The top 30 stocks are up 50% percent or more - but even with all this increase in group performance, another 12% gain is required before the group equals the 1997 low. "Full recovery is still a long way away" according to Don - but we are moving in the right direction.
While forecasts of the stort term outlook for this sector have been inherantly unreliable, the insights as to longer term trends can be valuable for the individual investor.
Needham Sees Slow Sector Recovery
Theodore O'Neill, semiconductor capital equipment analyst for Needham & Company, recently presented his outlook for this sector at an investor conference in San Diego. Noting that the industry is cyclical - and that no stock in this sector does well when the sector is depressed - he stated that the average company in the sector is down over 50% from the first of the year.
O'Neill reviewed the historical semiconductor sales rate and the semiconductor book-to-bill ratio, and noted that both the semiconductor sales and book-to-bill ratios declined sharply in 1997 - a decline much steeper than has been historically experienced. This has reduced sales of semiconductor equipment to levels not seen since 1993. O'Neill sees a very slow ramp up for semiconductor equipment through 1999, and he stated that several years of growth will be needed to reach the level of equipment sales experienced in 1997.
One of the most striking aspects of this market is the divergence between the small capitalization and larger capitalization stocks in this sector according to O'Neill. In his opinion the prices for the larger companies are "racing ahead of value" - and while companies like Applied Materials are fully or over-valued - smaller companies remain undervalued and attractive.
O'Neill predicts that by January there will be a lot more interest in the smaller semiconductor equipment companies because of the compelling valuations. Larger companies are selling at 5 or 6 times book value, while smaller companies are selling at or below book value. As money managers readjust their portfolios for the new year, smaller semiconductor equipment companies will be like "money on the floor" - just waiting for the institutions to "wake up" to the values.
In the semiconductor equipment sector O'Neill was of the opinion that testing and assembly companies would probably recover faster than the "front end" equipment suppliers. This is because as semiconductor features become finer new challenges will be presented in the testing and assembly sector, and photomask makers should also benefit from the trend to finer features.
O'Neill thought highly of small cap companies such as Brooks Automation, Helix Technologyes (SP), photomask makers Photronics and DuPont Photomask (SP), and Cymer (SP) are interesting investments at the current price.
* IC Insights & Semiconductor Industry Association Forecast
Worldwide semiconductor sales are increasing at a much stronger rate than typically seen at this time of year according to recent market data released by IC Insights, a consulting firm. Using a three-month rolling average, the firm concluded semiconductor sales in September were 4.3% higher than they were in August. During the 1990s, the average increase has been 2.3% between September and August. The firm is forecasting modest sales growth in 1999 of 10%, followed by 24% in 2000, and 30% in 2001.
These figures are roughly in line with the forecast released by the Semiconductor Industry Association recently. They predict a 9% increase next year, with growth continuing to accelerate through 2001, rising 49% from this year's levels. ''What we're seeing now is the bottom,'' said Jerry Sanders, chairman and chief executive of Advanced Micro Devices and the outgoing chairman of the SIA. The growth predictions for the industry "in some ways are conservative" according to Sanders.
* International Data Corporation & Dataquest
IDC expects semiconductor sales growth in 1999 will be a moderate 8.0%, driven by cutbacks in capacity and capital spending. Combined with second-half investments in new equipment to resolve the year 2000 problem, the semiconductor market should return to double-digit growth by the year 2000.
Dataquest is predicting that a big pickup in the dynamic RAM market will pull the semiconductor industry out of its slump next year, but the chip capital equipment market may have to wait longer for recovery. The worldwide semiconductor industry will grow by 11.8% in 1999, spurred by a 30% hike in DRAM sales according to Dataquest. That would be the first yearly gain in memory chips since 1995. Moreover, a convergence of factors will cause a big upsurge in 2000 and 2001 for both chips and the capital equipment used to make them, Dataquest predicted.
* Shortage of Semiconductor Photomasks
A number of experts at a recent American Electronics Association Classic conference warned that inadequate capacity is in place to meet expected demand for reticles (photomasks) required to produce chips with 0.25-micron and smaller linewidths. More designs are calling for these finer features which improve productivity and product characteristics.
"There is absolutely a huge problem coming up," said Art Zafiropoulo, president of Ultratech Stepper. "If there is a market turnaround, there may not be enough photomasks for quarter-micron and below." Delivery time of reticles, currently two days or less, could easily balloon to two weeks for leading edge mask sets, he added.
Dan Hutcheson, president of VLSI Research, San Jose, thinks a shortage has already started. Others believe the real crunch is still on the horizon. "It could very well be true that a shortage will exist by late next year," according to Gerald Fleming, director of research for Van Kasper & Co.
* PC Demand Increases, Inventory Glut Gone
Research firms MarketMaps and Centris said U.S. consumers are planning to purchase a record number of computers during the holiday season - and will buy five million PCs between Nov. 1, 1998, and Jan. 31, 1999. According to the survey of more than 2,000 households, consumers will spend more than $12 billion for PCs, software, and accessories. With inventories reduced as companies built to order, and acceleration of this sector could be quickly felt by suppliers. Some say this reduction of inventory, dubbed the "Dell Effect" by pundits, will spring-load the industry's recovery.
On top of all the forecasts, Intel stated that it expected higher fourth-quarter sales of its microprocessors than previously anticipated. As the world's largest chipmaker, Intel sets sales trends for the entire personal computer industry. So the company's statement that fourth-quarter sales were expected to be 8-10% above third-quarter revenues signaled stronger-than-expected growth for much of the US computer industry. Even better, Intel said demand for its chips was now strong in all geographic markets, and in all product segments.
Michael Murphy, editor of the California Technology Stock Letter, said stronger-than-expected fourth-quarter earnings for Intel pointed to a broad-based technology rally. "It's the right sign for the technology sector because what it's saying is there is still genuine double-digit growth in PC's." Growth has been "hidden" by the inventory glut that hung over the sector for the first two quarters, he said.
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Joe
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