Lehman Downgrades Semi Industry

Online staff -- Electronic News, 8/10/2004

Lehman Brothers updated its outlook on semiconductors, with its new expectations lower for some big name players.

Intel, Fairchild, Xilinx and On Semiconductor have all been downgraded by the market research firm on a less-than-steady market environment.

"We conclude that while it is possible that a near term rally may ensue following somewhat more encouraging PC trends in July, the issues weighing on semis in 2Q04 in terms of unit growth potentially running ahead of mixed end market demand may continue to loom as challenges may persist through 3Q04 and into 4Q04 and 1Q05," Tim Luke, a managing director at Lehman, said in a research note late Monday. "We therefore look to use this opportunity to re-align our outlook and move to a more neutral sector rating."

According to the firm, semi industry revenue grew more than 40 percent for first time in four years in April and June, and unit growth surpassed 20 percent for five of last six months. While much has been made of inventory concerns and while inventories with OEMs do not seem excessive relative to historical levels, Lehman considers higher inventories within distribution coupled with guidance from vendors of "normal seasonal" growth in Q3 may not leave much room for inventory to be worked lower. Inventory re-ordering may be restrained, the firm said, which suggests unit growth may need to move lower.

"Our reservations are more focused on unit and sales growth running ahead of consumption," Luke continued. "Therefore, consider capacity utilization rates may be peaking in 2Q/3Q04 with component pricing flattish going forward. Given absence of 'killer apps' to lift demand and without additional pricing leverage, consider CY05 semiconductor industry revenue forecast in 8 percent to 10 percent range more appropriate than prior 13 percent to 15 percent."
 
On that, Lehman lowered its rating on wireless equipment and wireless semis in July and retained equal weight on Texas Instruments with focus on its 3G play with Qualcomm. It also remains neutral on enterprise networking with a focus on Cisco (overweight) and noted communication ICs are also rated as neutral. 

"We are taking this opportunity to lower our CY05 estimates and price target on Intel, move comm play Xilinx and discrete vendor Fairchild both to equal weight from overweight, and fine-tune estimates on On Semiconductor (equal weight). Our European colleague Uli Pelzer retains his cautious outlook on STMicro, Philips and Infineon (all equal weight)," Luke concluded.

Intel's price target was dropped to $26 a share; Fairchild's to$18; Xilinx to $33; and On Semi's to $7.