Monday, October 02, 2006

Calls of Note Part 1

- Morgan Stanley comments on Semiconductor Industry Association (SIA) August revenue data released on Sept 30.

On a three-month-average basis, revenues of $20.5 billion were 2% higher than their estimate, and this represents a recovery from July, when revenues were 2% below firm's estimate. On a quarter-over-quarter and year-over-year basis, revenue growth remained relatively consistent, with 4% sequential (versus 3% in July) and 11% year-over-year (versus 12% in July) growth. While revenues in the month of September will be critical to how the overall quarter turns out, based on the July and August data, the firm currently expects the third quarter to grow 4%-6% sequentially and 5%-8% on a year-over-year basis. These growth rates compare with flat sequential and 10% year-over-year growth in the second quarter.

Quarter-to-date (July/August versus April/May), the overall semiconductor industry grew 7% sequentially on 4% unit growth and a 3% increase in average selling prices (ASPs). Within the major product categories, strength was led by DRAMs (up 19%) and MPUs (up 17%), which clearly reflects the seasonal uptick in PC build rates after a weak second quarter. However, after a 42% comparison in July (versus April), the growth rate in August slowed to 6% (versus May). Provided September represented relatively normal seasonality, then the MPU sector would grow at a low double-digit sequential rate in the third quarter, and AMD (NYSE:AMD) should exceed consensus estimates, while Intel (NASDAQ:INTC) would likely report in line to slightly higher than consensus results.

While NAND flash (up 8%), standard logic (up 8%), discretes (up 4%), and optoelectronics (up 4%) were generally in line with the growth rate of the overall semiconductor industry, most of the other major product segments have declined sequentially during the first two months of the quarter. NOR flash (down 6%) and DSPs (down 4%) represented the weakest segments, and the firm believes this reflects an inventory correction in the cellular phone supply chain.

Overall, they expect the number of negative earnings surprises in the third quarter to increase about threefold sequentially (to 35%-45% of all semiconductor companies). Given the sharp increase in negative earnings surprises, coupled with a deceleration in year-over-year growth rates and what will likely prove to be a decline in average operating margins for the overall semiconductor industry, the firm would expect the strong advance enjoyed by most semiconductor stocks during the last two months to succumb to profit taking in October.

Notablecalls: No real surprises in the SIA data. I hear Citi beating their chest on AMD/INTC saying SIA data confirms their thesis that Sept qtr will be strong. So what? It's the weakness in Dec qtr and beyond I'm worried about.

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