Semiconductors
Downgrade to Cautious –
Fundamentals Peaking
Fundamentals Peaking: Our EPS estimates have
gone from a 25% premium to consensus last spring to a
5% discount today, and EPS, gross margins, utilization
and growth metrics tell us that we are in the final innings
of the semi cycle. Peaking fundamentals lead us to shift
from mid-cycle to cycle-peak P/E multiples and lower
our price targets. On average, our price targets imply
5% upside to stocks. The SOX is up 74% off the bottom
but has started to underperform – we expect continued
underperformance and are sellers on rallies.
Post Bubble Peak EPS: Consensus is now forecasting
CY10 earnings that are within 2% of the post-bubble
peak. We think that Enterprise spending is the biggest
upside risk to our call, and that it could drive EPS higher,
but that higher EPS would be met by lower multiples.
Leverage Baked in: We are modeling average gross
margins for the group increase off the 1Q09 bottom by
over 500bps to near cycle peak by 2H10. Levered
earnings surprises are behind the group.
Momentum Indicators Peaking: YoY unit and
revenue growth will likely peak by 1Q10. The group
usually underperforms during those inflections.
Inventory Signals: Our models tell us the supply chain
has remained disciplined, with inventories near lows in
days. However, two things make us more cautious: 1)
inventories are creeping up in dollars, and 2) Taiwan
operations of notebook makers saw inventory dollars
spike QoQ, which raises risk for PC component vendors.
Upgrading Defensive Names, Downgrading PC
Names: We upgrade MXIM and LLTC to OW for their
defensive characteristics. Among the PC names, we
lower INTC to EW (risk of PC ship-ahead balanced by
potential for higher gross margins), ONNN to UW, and
NVDA to UW (concerns around competition). We remain
OW BRCM for its product cycles.