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Chip profits look rosy
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July 10, 2000: 5:59 p.m. ET
Semiconductor companies expected to turn in solid second-quarter results
By Staff Writer Richard Richtmyer
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NEW YORK (CNNfn) - Semiconductor stocks have been among the biggest gainers in the technology sector this year, and analysts are expecting a strong showing among chipmakers as they begin turning in their latest quarterly financial results this week.
Even analysts at Salomon Smith Barney - who, warning of a looming slowdown in growth, last week downgraded their rating on the semiconductor sector and several specific companies - agreed that the short-term outlook for chip companies remains strong.
"In general, it's been a very strong quarter, both in terms of companies' sales and earnings, and also in terms of their bookings," said Salomon Smith Barney analyst Clark Westmont.
Specifically, companies that sell chips designed for wire line communications applications such as fiber-optic networks will show the strongest results, Westmont said.
"Companies like Applied Micro Circuits (AMCC: Research, Estimates), PMC-Sierra (PMCS: Research, Estimates) and Broadcom (BRCM: Research, Estimates) will be real standouts with sequential sales growth in the 20 percent neighborhood," he said.
 As for last week's downgrade of the sector, Westmont said that was driven primarily by what his firm sees as the current shortage of supply in the industry gradually crossing into equilibrium and then oversupply sometime in the first half of 2001 as chipmakers add capacity to their manufacturing operations.
When there is an oversupply of semiconductors in the marketplace, prices fall and subsequently so do chipmakers' bottom lines. The semiconductor industry historically has moved in cycles where down periods of oversupply are followed by up periods of undersupply.
Most other analysts expect the current up cycle to last until 2002.
Information provided by the Semiconductor Industry Association also indicates a strong second quarter. The SIA reported that global chip sales soared to record levels in both April and May, prompting the chip-industry trade group to revise upward its growth forecast.
After rising 31 percent to $195 billion in 2000, the SIA said it expects chip sales to expand 25 percent to $244 billion in 2001 and 14 percent to $279 billion in 2002.
Despite Salomon Smith Barney's dissenting investment thesis on the semiconductor sector, the firm sees continued strength through the second half of this year, according to Westmont.
 "The short-term outlook will be very positive, because it does take time," he said. "It will take six- to- nine months for those kinds of things to manifest themselves in the companies' sales and earnings outlook."
Joe Osha, semiconductor analyst at Merrill Lynch, is expecting "excellent" results from chipmakers when they start turning in their quarterly results, characterizing any blips in chip-sector stocks as a "mid-cycle correction."
"Recent concerns regarding the state of the industry notwithstanding, we expect June quarter results and the September quarter outlook for the semiconductor business to be excellent," Osha said in a note to clients Monday.
"We have been calling for a mid-cycle correction in semiconductor stocks for several months, and believe that investors should use current weakness as a buying opportunity," Osha added.
Among the stocks Merrill expects particularly strong results from are LSI Logic (LSI: Research, Estimates), Atmel (ATML: Research, Estimates), Cypress (CY: Research, Estimates), Analog Devices (ADI: Research, Estimates), Broadcom, PMC-Sierra, Applied Micro Circuits and Vitesse (VTSS: Research, Estimates), Osha said.
"We think that recent price weakness is a particularly excellent opportunity to buy some of the high-quality fabless communications-oriented names in our universe," he said. In the chip industry, "fabless" refers to companies that design and sell chips but have the manufacturing done by outside companies, called foundries, on a contract basis.
Drew Peck, semiconductor analyst at SG Cowen, concurred that the industry as a whole will turn in strong results for the quarter. But he said he'll be keeping his eye on two of its biggest players.
Intel (INTC: Research, Estimates), the world's largest chip supplier, has decided that it will include non-operating income of $2.3 billion from the sale of equity investments in its upcoming results.
"The operations of that company I think should come under close scrutiny because the number is going to be very large related to securities sales," Peck said "And as we've seen over the last couple of quarters, sometimes that tends to disguise what's actually going on in their core operating business. Intel will look good, but the results obviously are going to be grossly inflated."
Peck also pointed to Texas Instruments (TXN: Research, Estimates), the leading supplier of analog chips, as a wild card.
 "Texas Instruments is a real mixed bag here, because on the one hand you have a very strong environment for the analog component business, but as we saw last quarter, the hard-disk drive business, in which they have an unusually large exposure, is weak," Peck said. The question is, 'Which one of those is going to prevail?' "
The Philadelphia Stock Exchange's semiconductor index, or Soxx, edged down 7.2 to 1153.22 Monday.
Though the sector has been choppy, chip stocks have been some of the strongest technology performers this year. At Monday's close, the Soxx was up more than 63 percent year-to-date. That compares with a near 3 percent decline on the tech-laden Nasdaq composite index during the same period. 
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