Semiconductors Have Brighter Future
With Ken Nagy Aug 12, 2008
When we recently sat down with Zacks senior semiconductor industry analyst Ken Nagy, CFA, we were interested in finding out what the positives were in the outlook on the semiconductor industry. What we got was that, plus some timely Buy and Sell recommendations.
The semiconductor industry looks to be gaining some traction near-term. What Buy recommendations do you have for us at this time.
Perhaps I can best answer this question by citing the most recent Buy report on which I have issued a Buy report -- ASML (ASML). ASML is the largest OEM [original equipment manufacturer] of advanced photolithography systems used within the semiconductor manufacturing industry.
June quarter revenue and EPS outperformed consensus estimates. The company has the leading position in the next generation immersion lithography tools, which will lead to long-term growth.
The firm is managing weakness in the markets by cutting SG&A [selling, general and administrative] and R&D [research and development] expenses. Looking ahead to 2009, management expects a positive tail wind, given the DRAM ramp-up of 55 nanometer, the healthy revenue growth at foundry customers, and the transition to double patterning lithography by flash memory leaders.
In what ways is ASML a market leader?
Well, the company is the world's leading provider of lithography systems for the semiconductor industry, manufacturing complex machines that are critical to the production of integrated circuits or chips. ASML feels the industry will require different architectures for each sub technology.
The company plans to make 20-30% of this spending flexible so during downturns it could scale back. The company also has two EUV tools it plans to ship this quarter. This speaks to technology leadership.
ASML’s 193nm introduction is unlikely to face competition, at least in the near-term. In addition, the used equipment market is also improving, with tier II customers increasing their capacity by adding 200mm tools. The 200mm tools have better gross margins than the 300mm products, since these products are newer.
Is there another semiconductor recommendation you would make for us today?
ON Semiconductor (ONNN) is an OEM of primarily analog semiconductors used within a diverse set of end markets. On August 6th, the company announced the total revenues in the second quarter of 2008 was a record $562.7 million, an increase of approximately 33% from the first quarter of 2008.
The company now gets significant revenue from its recent major purchase of LSI Logic’s (LSI) Gresham, Oregon wafer facility, which has the potential to be a solid revenue driver. The products produced at the Gresham facility are of the high margin variety. We feel the stock is under valued at these levels, and recommend investors buy the shares. Our target price is $13.
What is it that makes ONNN such a strong Buy, in your view?
ONNN serve a broad base of end-user markets, including computing, automotive electronics, consumer electronics, industrial electronics, wireless communications and networking. Applications for its products in these markets include portable electronics, computers, game stations, servers, automotive and industrial automation control systems, routers, switches, storage-area networks and automated test equipment. ONNN s extensive portfolio of devices enables it to offer advanced integrated circuits and the building block components that deliver system level functionality and design solutions.
Do you have any Sells for us to be wary of?
FormFactor (FORM) is the market leader in advanced wafer probe cards used to test semiconductor wafers during the manufacturing process. The combination of a very difficult pricing environment in DRAM and product execution problems, in the 4th quarter have led to the shares being slammed.
The company has a very strong long-term growth profile, but it appears as though the DRAM market will not improve in the near term. We envision a strong future for FORM, but for the next two quarters FORM should not see strength in DRAM.
DRAM market conditions continue to be difficult for FORM’s customers despite prices staying weak. Given the current price of DRAM and customers' need to conserve cash, manufacturers are having difficulty investing sufficiently to yield at the next node 65, 68 nanometers. Consequently, we are decreasing our price target to $17.00, which corresponds to a P/B [price-to-book] multiple of 1.1x.
Ken Nagy, CFA is a senior analyst covering the semiconductor industry for Zacks Equity Research.