Semiconductors
PRE RESULTS COMMENT
4Q Earnings Preview
■
4Q downside, 1Q more downside. 38 chip companies (93% of our tracked
universe) have already pre-announced C4Q results, moving 4Q aggregate
revenue decline from initial guidance of -10.8% to current guidance of
-21.5%. This will mark a record q/q decline and is inline with our tops down
estimate of -22.8%. While compares would seem easy, channel checks
would indicate that most companies exited 4Q with book to bills below 0.8 to
1, implying 1Q revenue declines of greater than 20% unless turns improve
q/q. While a sharp fall off in turns in C4Q could set up for easy compares, we
are concerned that end consumption continues to deteriorate which should
lead to 1Q revenue declines greater than C4Q for all but a handful of
companies. We believe that 1Q09 downside and another round of 2009
estimate reductions is not fully reflected into stocks. We would anticipate
another volatile trading environment thru earnings which begins this week
with LLTC and XLNX on Wednesday and INTC on Thursday.
■
2009 Outlook: Dip a toe, be ready to pull back. We believe investors
should have some exposure to the group anticipating what should be
inflection points in utilization, year over year unit growth, and gross margins
in either 1Q or early 2Q. Historically stocks have reacted positively to this
inflection points. HOWEVER, we do not believe investors should blindly
chase rallies at this time, as we see no sustained recovery in fundamentals
unto 2H09 at the earliest. We suspect that investors have underestimated
demand destruction going into C1Q, forgetting that as weak as C4Q
seemed, it still benefited from X-Mas, Year-end budget flush and the pullforward
effect of price discounting. Weakening demand is likely to prolong
the inventory cycle - we estimate 4Q dollar inventory up 4.6% q/q and days
to increase by 17.7, we estimate 1Q inventory dollars flat and days to
increase 17.2. In addition, depressed utilization rates will lead to increased
pricing pressure as unit growth resumes in C2Q - suggesting no sustained
recovery until late 2009 or 2010.

Valuation Less Compelling After Rally But Attractive in the Long-Term. Semi
stocks are trading at 17.4x NTM P/E, 8.0x EV/EBITDA and 1.4x P/S, which is 55-85%
up from the trough in November 2008, with approximately a third of the increase
driven by share price rallies. Correspondingly, the discount to average multiples in the
post-bubble era has declined to 25-50% from 60-70% in November 2008. With further
downside to 2009 estimates likely after 1Q09 guidance, semi multiples in general don’t
appear heavily depressed relative to near-term outlook. We could see multiple rallies
off the November 2008 trough before a final trough is reached, similar to the pattern in
2001-02, but we believe the greatest opportunity awaits patient investors who focus on
the next cyclical upturn. We believe ingredients are in place for a strong utilization and
ASP cycle in semis, now that 300mm transition is largely in place.
■ Stock Selection. Our top picks on the long side would include: LLTC, TSMC, MU,
ONNN and INTC (especially after 1Q guidance). As far as stocks we would be
reluctant to chase - NSM, ISIL, and TXN.
o INTC. For INTC, while a Q1 revenue shortfall, inventory levels and near-term
GMs remain concerning, we continue to believe that structurally, INTC is poised
to benefit from accelerating PC growth, market share gains and ramp of higher
margin 32nm products in 2010.
o MU. We are positive on MU as a cyclical winner with a relatively stable balance
sheet. We believe memory supply growth is slowing into 2009, and valuation
(P/B) remains well below prior trough levels.
o LLTC. We continue to view LLTC as a solid defensive play in a sustained
downturn, with the company’s disciplined approach to pricing and lengthy revenue
cycles (note that margins declined just 1.6pts in the 2001 downturn, while GM’s of
its peers declined an average 8 points).
o ONNN. For ONNN, we estimate that valuation is depressed (discount to analog
peers widened to 54% from historical 30%) is caused by investor concerns over
leverage (debt/cap of 53%). We see limited liquidity risks as we estimate FCF
over the next two years to exceed $650m, vs. $400m in total debt maturities over
the same period. With ongoing cost savings from both its core business and its
AMIS integration, we believe the company is positioned to weather the downturn
much better than its 2001 self.
o TSMC. We would continue to view the stock having a strong support and riskreward
case in the $6-7 range of NT$34-36, a level that reflects 10x average
cycle earnings and trough 2x P/B. Into results we see three key overhangs: 1)
weak semiconductor customer and OEM results, 2) high semiconductor inventory
days exiting 4Q, and 3) downside to foundry and back-end estimates. On
weakness, the stock makes a compelling early cycle case for a cyclical rebound
into an order recovery in 2Q and bottom in Y/Y growth in late 1Q with structural
support from its wide gap to competitors in technology and financial footing.
o MXIM. We remain reluctant to chase MXIM, given that we expect the company to
be disproportionately impacted by its higher exposure to consumer (1/4 of
revenues), and we believe the company could take a more proactive approach to
cutting costs.
o TXN. TXN remains another stock to avoid, given the potential for a prolonged and
messy divorce from its merchant baseband business, and the likelihood for its
custom baseband business to act as a drag.
o ISIL. While ISIL’s March qtr guidance could be relatively better vis-à-vis its peers
(largely as a result of its -41.5% q/q guidance for the December qtr), we remain
concerned with (1) overhang from customers being on allocation for its computing
power management products, (2) high consumer exposure (25% of revs), and (3)
12% q/q growth in inventories in Sep qtr that is likely to continue in the Dec qtr.
■ Comm ICs – Risks Into 1Q Create Need For Patience (Abrams). We see downside
to 1Q estimates for all the stocks in our coverage. Our relative pick is Broadcom, but in

the near-term, see downside due to a pause in set-tops, some share loss in 2H09 to
CSR in Bluetooth and slowdown across Ethernet and wireless connectivity. While
Marvell is our stock to watch for 2009, we see a continued pullback on downside into
F4Q09 (Jan) due to exposure to the weakening PC vertical (HDDs and printers). Key
product cycles include a new application processor into netbooks, plugtop computing
in enterprise networking, and the Seagate HDD ramp in 2010. Finally for PLDs, we
are cautious after the companies held up relatively well in 4Q08 (down high single
digits versus down 21% for the group) but a slowdown in infrastructure and broad
based industrial likely causes these to play catch-up on the way down.
■ Foundries and Back-end – More Compelling Near Trough 4Q Levels
(Abrams/Chen). We would let stocks pull back closer to November lows as we must
still weather reports of high inventory, slowing sales, and downside to estimates. Later
in 1Q, we see potential for a more meaningful rally as we approach a cyclical rebound
in orders. The companies are seeing a 60% peak-to-trough pullback which allows for
better than L-shaped recovery at the back of the supply chain. Our relatively safe pick
for downside protection is TSMC, with SPIL and then ASE to provide cyclical leverage
off the bottom – though we believe still too early into weak results and 1Q09 operating
losses.