Thursday, November 30, 2006

- Susquehanna Financial notes their recent checks suggest that several North American IDMs have started to sharply reduce wafer starts. This is unsurprising given firm's analysis of industry fundamentals, which suggests that IC unit production is likely to dip from current above-trend levels to more normalized levels over the next several months. They see these as caution signals for semiconductor stocks generally, and continue to see at least 10-15% downside risk to the SOX.

Only two semi industry downturns in the last 30 years have been driven by a drop in demand (defined as multi-quarter negative IC unit growth). However, after more than a year above trendline, we are almost certain to see at least a dip in unit production over the next several quarters. In a worst-case scenario, we could see a drop significantly below the long-term trendline - the last time this happened was in 2001, after IC units had spent the prior 20 months above trendline. IC units have been above trendline for 14 months.

While the firm remains impressed with Texas Instrument's (NYSE:TXN) execution and strong product cycles in 3G and high-performance analog, their checks suggest that the chipmaker is cutting wafer starts at its internal manufacturing facilities, as well as with foundry partners due to worse than anticipated demand from at least one major handset customer, as well as generally slowing analog unit growth. Firm would not be surprised if management takes F4Q06 (December) guidance to the low end of the previous range ($3.46 bln-$3.75 bln/$0.40-$0.47) during the mid-quarter update on December 11.Recommends that investors consider getting more constructive if valuation dips below 16x P/E NTM - the stock currently trades at 17.2x CY07 EPS estimate of $1.70. Negative Factor

Firm is also cautious on AMD (NYSE:AMD).

Notablecalls: Not actionable but good to know category.

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