The Sandbox

After last week’s Wall Street plunge, it was a relief to receive word that all was not lost at least at Lehman Brothers as C.J. Muse, semiconductor equipment/display technologies analyst there continued to send out his reports.

With word of a number of fab closures, sales and cutbacks as well as floundering equipment sales, Muse said in a report Friday that in terms of semiconductor manufacturing equipment, the “conviction level on a sustained recovery is quite slim, suggesting to us that the group will likely lag the overall technology space if and when a recovery does emerge.”

“Considering this view coupled with valuations that are expensive relative to other segments of tech, we tend to view the group with risk to the downside for the foreseeable future. What we do think is that, considering declining secular growth story as well as headwinds from secular shifts in memory, investors will likely begin focusing more on "earnings power" as opposed to "historical book" and "revenue based" trough levels for stock support and on this front, we see risk to the downside for the group.”

I appreciate this viewpoint, and I recall that in July when I spoke with Novellus’ CEO Rick Hill during Semicon West, he reminded me that while the spending is way down, there is still spending happening because if it does not occur, many companies would be out of business when the upswing comes, due to lack of readiness. So while the situation looks dire, it will get better at some point.

Muse has also reduced his capex outlook for 2009 to -15% from flat to +5%, saying, “This assessment is based on (i) view that memory will continue to remain in oversupply through 1H09 and that this will drive another leg down in capex spending, (ii) macro-haze that will slow demand and limit recapture of pricing power by foundries which will therefore drive only incremental capacity adds there, and (iii) view that while Intel will adopt Immersion, equipment re-use combined with muted spending by other IDMs will drive a slight decrease to capex in the logic market.

Further, pointing to Q4 order pickup clearly being at risk, Muse said, “In the last several weeks, further weakness has slowly but surely seeped in. There has been no resolution to Meiya orders - no P.O.s have been placed yet. Micron has also indicated that IMFS capacity buildout may be pushed out beyond 2009. Elpida and Powerchip have reduced their production and indicated that they will slow down their capacity increase. Samsung L16 and TSMC Fab 12 Phase 4 for 45-nm have also been pushed out to 1Q09 from 4Q08 orders. All in all, a further slowing down of orders in both the memory and the foundry segments has occurred and clearly puts the much anticipated 4Q order pickup at risk.”

In terms of recovery, Muse believes that 2009 will start out with a continuing overcapacity in memory, with many of the memory companies neither profitable nor in any position to spend. In logic, Muse expects Intel to likely spend more in connection with its 32-nm ramp, but logic ex-Intel’s mantra of "asset-lite" will continue, though it is only likely to mean further flattish foundry capex spend or just-in-time ordering of capacity at the foundries.

“That might also become an overall trend, as our checks suggest that visibility is low and in each segment, capital equipment orders are placed closer to their use-date than ever before. To this end, while we see a modest uptick in 4Q08 orders driven more by seasonality and confluence of a few large orders, we do not view such a recovery as sustainable and view 1H09 outlook as still relatively weak. We then expect a modest order recovery sometime in 2H09 given our expectation for capex in 2010 to be up 5-10% Y/Y fueled by NAND capacity expansion for SSD’s combined with volume production of 45-nm at leading fabless players,” he noted.

Muse maintained his neutral rating on semiconductor manufacturing equipment stocks.