Friday, July 8, 2011

Getting bearish: Analyst cut back 2011 SCE, but improve 2012

A handful of industry watchers are lowering their 2011 outlooks for semiconductor capital spending, betting that there's more bad news ahead -- but 2012 might not be as bad as feared.

The bad news? SCE orders, which have been on a downward slide, now likely won't get better (and probably will get worse) through 3Q11, and 2011 looks a little less rosy than before. The good news: many think 2012 might not be as rough as feared, so the expected Y/Y dropoff may not be as painful.

Credit Suisse's Satya Kumar is lowering his expectations for capex, wafer starts, and some memory themes, citing elevating chip inventories, still-sluggish consumer PC demand, and some non-Apple tablet vendors cutting component orders.

For capex, Kumar is lowering his 2011 outlook for semiconductor capital equipment to 9% growth (vs. 15%) to $55.2B, but raising it for 2012 to flat growth/$55.1B (vs. a -9% slide). More granularly, he sees SCE orders down about -20% sequentially in 2Q11, and 3Q11 orders flat to down -10%. "SCE companies have been talking about order pushouts since April," he explains, and "the order and capex environment has not improved through June."

Kumar is still bullish on rising capital intensity in semiconductor manufacturing. PC and tablet sell-through is still up 15% in 2011 (smartphones up 50%), he notes, so the issue is not so much weak consumer demand -- it's rethinking expectations about supply chain normalization vs. sell-through, he says.

Other analysts are also lowering their 2011 outlooks. Days ago, Barclays' CJ Muse likewise lowered his take on semiconductor equipment spending, recasting his 2012 outlook to $48.5B (a -10% decline vs. a flat/-10% range). His main concern is foundries which could slash spending by -20% next year; NAND makers will cut back to flat or -10% too, and there'll be a -15% decline in logic led by a -22% dropoff at Intel, he warns.

Also in the past week, Needham analyst Edwin Mok cut his semi capex estimates for both 2011 ($56.1B vs. $59.2B) and 2012 ($56.9B, ekeing 1% growth), citing pushouts by Samsung and TSMC that have dented 2Q11 orders by -10% to -25% -- and he thinks there will be more bad news coming in the current quarter (3Q11), with sales possibly flat or even down another -10% (overall Street is expecting -2%). While some of the pushed-out orders have returned [e.g. Samsung for NAND], we believe TSMC has put its Fab 14 expansion on hold," Mok writes.

And RBC Capital's Mahesh Sanganeria has reduced his outlook for semiconductor capital spending to 4% in 2011 instead of 11% (though improving 2012 to a -9% decline instead of -17%). TSMC orders have helped give a brighter picture, but now the foundry seems "caught up after underinvesting" and since April has pulled in the reins "significantly," he writes.

Overall the new outlooks have several things in common:

- More bad news in 3Q11, but probably a trough for overall SCE orders, and for front-end tool shipments.

- For sector stocks, valuations are really low -- as in low-teens or even single-digit multiples vs. 2011 expected earnings (though of course earnings outlooks change quarterly), and in the mid-teens vs. S&P multiple. Many chip equipment stocks have been taking a beating, down 10%-20% or more in 2Q11, most likely as investors gird up for anticipated lean times ahead for the industry -- so the analyst bears' partial forecast improvements for 2012 could be a welcome sign.

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