Some interesting comments in Semi land this morning:
- J.P. Morgan notes that on August 1, the SIA announced June monthly sales of $27.2 billion or a MoM increase of 13.1%, well below the average June MoM increase of 20.8% and well below their estimate of a 20.8% MoM increase or $29.0 billion. The three-month rolling average sales for April-June increased 42.6% YoY to $24.9 billion, below our estimate of $25.5 billion.
Weakness in June was broad based, with microprocessors, flash, and DSP chips exhibiting the lowest MoM revenue growth relative to their seasonal norms. As the figure below illustrates, JPM believes the 3 month rolling average YoY revenue growth in 2010 peaked in March at 60% and will trend down to a trough of 12% in December as the easy comps in 1Q10 go away.
Still cautious on semis – hide in defensive stocks. JPM continues to be cautious on semiconductor stocks as we are seeing several signs of softening demand for technology products across the globe. Their top pick continues to be Overweight rated Linear Technology (LLTC), firm's semiconductor “igloo”.
Not time to “buy semis because the downturn is already priced in.” JPM believes the semiconductor sector is exhibiting the classic first signs of a correction – lead times being reduced and bookings dropping. For the first time since the previous downturn, we are witnessing several instances of semiconductor companies missing estimates and/or lowering guidance. Since the downside to estimates during a downturn is usually underestimated, they do not believe the downturn is priced into semiconductor stocks.
- Amusingly, Merrill Lynch/BAC is out this morning trying to blow up JPM's "igloo" by downgrading Linear Tech (NASDAQ:LLTC) to Underperform from Neutral with a $30 price target (prev. $33).
Their cautious stance is predicated primarily on intermediate term risks in the industrial and auto segments, with our analysis suggesting a sizeable overshoot in shipments vs. true demand/consumption. Further, they see risk of commoditization of high end computing designs, a driver of recent and anticipated growth.
Overstaying its welcome at the Industrial party
Although late to the party, Linear has in recent qtrs benefited from the recovery in the industrial segment, with bookings in this segment (37% of total bookings) up 104% from the lows. The good news in Merrill's view ends here, as current bookings - at a level that is 23% above the prior qtrly peak run rate - represent an overshoot vs. actual demand as implied by global industrial production, with the latter only just about reverting to prior peak levels. Firm thinks this overshoot is the result of extended lead times and perceptions around capacity constraints. A mean reversion (and possibly an undershoot) is likely to compensate for this overshoot, thus setting the stage for an inventory correction in this segment in coming qtrs.
Autos poised to run out of gas
A similar story, they think, exists in the auto segment where orders seem to be well above levels supported by auto production trends. While we concede that some of this growth is driven by silicon content growth in autos (a secular theme) they view the discrepancy between Linear’s auto bookings and global auto production as too large to be simply attributed to content growth.
Reducing estimates
While Merrill expects an upward bias to near-term ests fueled in part by a continued inventory overshoot given supply constraints/extended lead times, they think the longer this dynamic persists the greater the risk to estimates. PO moves to $30 from $33 or 13x Merrill's CY11E EPS; their already sub consensus FY12 EPS est. also trickles lower.
- Baird's Semi team is downgrading a host of names (DIOD/FCS/ONNN/STM/TXN/MU) saying inflection point in lead times occured last week.
While remaining above normal, lead times at large worldwide distributors fell sharply last week for the first time this year. Baird's recent checks point to reduced back-end revenue outlooks for 3Q, lower visibility across the technology supply chain, along with ongoing reductions in component orders from tier-one PC OEMs
Baird's downgrade of several analog semiconductor companies reflects their belief falling lead times will lead not only to a steep fall in backlog, but also eventually to order cancellations which could impact 4Q10/1Q11.
Notablecalls: With Merrill pissing on JPM's igloo saying bookings are in for a big correction & Baird basically backing the same view, I think LLTC is a short.
As grand master Frank Zappa said: Don't Eat The Yellow Snow.
I would also keep the Baird downgrades on radar. Would short Texas Instruments (NYSE:TXN). This puppy is losing steam, it seems.
- J.P. Morgan notes that on August 1, the SIA announced June monthly sales of $27.2 billion or a MoM increase of 13.1%, well below the average June MoM increase of 20.8% and well below their estimate of a 20.8% MoM increase or $29.0 billion. The three-month rolling average sales for April-June increased 42.6% YoY to $24.9 billion, below our estimate of $25.5 billion.
Weakness in June was broad based, with microprocessors, flash, and DSP chips exhibiting the lowest MoM revenue growth relative to their seasonal norms. As the figure below illustrates, JPM believes the 3 month rolling average YoY revenue growth in 2010 peaked in March at 60% and will trend down to a trough of 12% in December as the easy comps in 1Q10 go away.
Still cautious on semis – hide in defensive stocks. JPM continues to be cautious on semiconductor stocks as we are seeing several signs of softening demand for technology products across the globe. Their top pick continues to be Overweight rated Linear Technology (LLTC), firm's semiconductor “igloo”.
Not time to “buy semis because the downturn is already priced in.” JPM believes the semiconductor sector is exhibiting the classic first signs of a correction – lead times being reduced and bookings dropping. For the first time since the previous downturn, we are witnessing several instances of semiconductor companies missing estimates and/or lowering guidance. Since the downside to estimates during a downturn is usually underestimated, they do not believe the downturn is priced into semiconductor stocks.
- Amusingly, Merrill Lynch/BAC is out this morning trying to blow up JPM's "igloo" by downgrading Linear Tech (NASDAQ:LLTC) to Underperform from Neutral with a $30 price target (prev. $33).
Their cautious stance is predicated primarily on intermediate term risks in the industrial and auto segments, with our analysis suggesting a sizeable overshoot in shipments vs. true demand/consumption. Further, they see risk of commoditization of high end computing designs, a driver of recent and anticipated growth.
Overstaying its welcome at the Industrial party
Although late to the party, Linear has in recent qtrs benefited from the recovery in the industrial segment, with bookings in this segment (37% of total bookings) up 104% from the lows. The good news in Merrill's view ends here, as current bookings - at a level that is 23% above the prior qtrly peak run rate - represent an overshoot vs. actual demand as implied by global industrial production, with the latter only just about reverting to prior peak levels. Firm thinks this overshoot is the result of extended lead times and perceptions around capacity constraints. A mean reversion (and possibly an undershoot) is likely to compensate for this overshoot, thus setting the stage for an inventory correction in this segment in coming qtrs.
Autos poised to run out of gas
A similar story, they think, exists in the auto segment where orders seem to be well above levels supported by auto production trends. While we concede that some of this growth is driven by silicon content growth in autos (a secular theme) they view the discrepancy between Linear’s auto bookings and global auto production as too large to be simply attributed to content growth.
Reducing estimates
While Merrill expects an upward bias to near-term ests fueled in part by a continued inventory overshoot given supply constraints/extended lead times, they think the longer this dynamic persists the greater the risk to estimates. PO moves to $30 from $33 or 13x Merrill's CY11E EPS; their already sub consensus FY12 EPS est. also trickles lower.
- Baird's Semi team is downgrading a host of names (DIOD/FCS/ONNN/STM/TXN/MU) saying inflection point in lead times occured last week.
While remaining above normal, lead times at large worldwide distributors fell sharply last week for the first time this year. Baird's recent checks point to reduced back-end revenue outlooks for 3Q, lower visibility across the technology supply chain, along with ongoing reductions in component orders from tier-one PC OEMs
Baird's downgrade of several analog semiconductor companies reflects their belief falling lead times will lead not only to a steep fall in backlog, but also eventually to order cancellations which could impact 4Q10/1Q11.
Notablecalls: With Merrill pissing on JPM's igloo saying bookings are in for a big correction & Baird basically backing the same view, I think LLTC is a short.
As grand master Frank Zappa said: Don't Eat The Yellow Snow.
I would also keep the Baird downgrades on radar. Would short Texas Instruments (NYSE:TXN). This puppy is losing steam, it seems.
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