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VIDEOTime to Buy Wafer Fab Equipment Stocks?
By
Bob Faulkner Jul 13, 2010 11:15 am
Novellus kicked off earnings season for the tech sector, and many earnings estimates seem upward bound.
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Yes, they’re well off their March 2009 lows, but most stocks are. The more important point at this juncture is that they remain quite inexpensive and earnings estimates are heading up.
The table below is just a sampling of some of the bigger names in the industry. What you see is the change in earnings over the last three months for each of the next two fiscal years. The median for fiscal year 2010 is an increase of 28% and for fiscal year 2011 it's 36%. While that’s been taking place the stocks haven’t exactly been setting the world on fire and the multiples on future earnings are quite modest.
The bear argument that will be made is that these are now pure cyclicals and 2011 will be peak earnings for these companies. Commodities are pure cyclicals too but that hasn’t stopped anyone from making money in them. But the more important issues were highlighted by Novellus on its conference call last night.
It’s been no secret that semiconductor-manufacturing capacity is tight in all segments of the market. Novellus estimated that capacity utilization was 94% in its June quarter and will rise to 96% in the September quarter. That's partially due to the plunge in capital spending that hit in 2008-2009. But it's also due to the decommissioning of many 200mm wafer fabs that are no longer economically viable in some areas. Rather than absorb the billions necessary for their own 300mm facilities, that demand is shifting to foundries. Novellus estimates that it will require five large (50k wafers/month) 300mm fabs to compensate for the reduced 200mm capacity.
I think the other issue that’s being overlooked in the “peak earnings” argument is the economy. The semiconductor industry is operating at 96% capacity utilization in a very weak economic environment. What’s it going to look like if economies pick up? Under that scenario it’s not hard to imagine capital spending increasing beyond 2011.
I’m not in the double-dip camp at this point but that economic bet is something we all have to wrestle with individually. That being said, these are some “cheap stocks.”
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No positions in stocks mentioned.
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