Friday, January 22, 2010

Semiconductor Equipment: Cycle not “over” but see risk of ~30% correction - Citigroup

Citigroup's Semiconductor Equipment team is downgrading 5 equipment stocks to Sell and 2 to Hold.

Downgrading 7 semi equip stocks; cycle not “over” but see risk of ~30% correction — After adopting a more balanced cyclical view last Oct ’09, Citi is digging in their heels as tool shipments now running at levels that imply more significant capacity adds, chip inventory is building ahead of a potentially risky CQ2 based on recent seasonal trends, and capex is (they think) being pulled into 1H from 2H:10 and 2011. With as much as ~30% correction potentially in the offing over the next 3-6mos, firm is downgrading KLAC, ATMI, BRKS, ENTG and AEIS from Hold to Sell and downgrading NVLS and AMAT from Buy to Hold. They are removing AMAT from Top Picks Live. Firm maintains Sell ratings on ASML.AS and LRCX and a Buy on FORM given valuation and DDR3 exposure.

With respect to current business, clearly, it remains strong. To wit, checks suggest LRCX is set to ship the most tools in company history in FQ3:10 (Mar) and even when excluding ~20 clean systems, shipments look to be only 10- 15% shy of ’07 peak levels. Additionally, ASML is now guiding shipments to a level in CQ2:10 that equates to ~$45-50B/yr capex, or up ~125% Y/Y relative to the ~$20-22B capex in 2009. Because the Street is still modeling equipment company revenue growth of ~70% Y/Y in 2010, this implies estimates will move higher again through earnings season. However, Citi feels this is the last of the estimate increases for at least the next several Qs and the risk now shifts more to the downside moving through the year.

Semi fundamentals concern while signs of supply acceleration are evident — Recent history suggests CQ2 may be the new CQ1 from a seasonality perspective and Y/Y IC unit trends portend a period of multi-Q inventory build. While the firm acknowledges absolute levels remain low, this is potent dry kindling for the emergence of more choppiness in the supply chain. Additionally, surging tool shipments now equate to 1H:10 run-rate equivalent of ~$40-50B/yr in capex, historically a level that drives meaningful capacity adds. Even without meaningful capacity adds, they estimate IC units would have to grow ~20% Y/Y in 2010 to result in more widespread capacity shortages.

Citi notes they didn’t under-spend long enough to drive a multi-year sustained capex cycle just yet — Assuming a normalized level of ~$25B/yr in wafer fab equipment, a new analysis suggests the financial crisis simply worked off the excess created in 2006/2007 but spending didn’t remain bad for long enough to drive the type of big accumulated deficit that existed in 2003/2004. While technology buys remain robust, this implies the Street may be over-estimating the sustainability of the bounce-back. While NAND has yet to spend much, Citi estimates it could drive a few $B capex which may only go to offset declines in other segments like foundry.

The duration of the rally in the SOXX is becoming extended from a historical perspective. While hardly a fundamental factor, it is worth noting that the past six sustained rallies in the SOXX (defined as periods with corrections of no more than ~10%) have ranged from 53 to 75 months with an average of 66 months. With the SOXX now in the 61st month of sustained appreciation without a >10% correction, this could be another reason to believe the group is in for a breather. From the peaks in these sustained moves, the SOXX has pulled back an average of ~30% over the following 6mos and ultimately declined an average of ~45% peak to trough. While this sort of a decline appears unlikely given inventories that remain on the lean side by historical standards, the balance seems skewed to the negative and if inventory build continues, there would appear to be enough risk that they would rather step aside and come back to the group in another couple of Qs.

Notablecalls: It's always interesting to read what the quantitatively oriented Citi Semiconductor Equipment team has to say. We have seen some sell-the-news reactions in the space lately which usually indicates that some market participants are feeling uncomfortable holding or buying around current levels.

It looks like Citi is quite aggressively taking down their target prices for some of the names, so I think there will be selling pressure there. Note that Citi's estimates for many of these names are still above consensus.

I would not be surprised to see some of the names (especially the smaller ones) trade down by 5%+ in reaction to this Citi call.

1 comment:

dcxavier said...

If you are looking for signs, Taiwan backend house KYEC reported they plan to reduce capex in 2010. 2009 included the disastrous Q1, so announcing a 2010 reduction is a big deal. Backend companies do packaging and testing on demand from the distributors, so they are usually where you see turns in the market first.