Q1 Performance Table

A quick review of first quarter performance for a few chip, chip equipment, subcontract and EDA issues is in order (prices in the table do not include action during the last two trading sessions):

Company                 Symbol       '05 close     Q1 '06 close 

Intel                    INTC          $24.98        $19.46   
Texas Instruments        TXN           $32.07        $32.47   
Micron                   MU            $13.31        $14.72
Advanced Micro Devices   AMD           $30.60        $33.16   
STMicroelectronics       STM           $18.00        $18.39           
TSMC                     TSM           $ 8.09        $10.06
Analog Devices           ADI           $35.87        $38.29
Maxim                    MXIM          $36.24        $37.15

Applied Materials        AMAT          $18.49        $17.51
KLA-Tencor               KLAC          $49.33        $48.36
ASML                     ASML          $20.08        $20.37
Lam Research             LRCX          $35.68        $43.00
Novellus                 NVLS          $24.12        $24.00
Varian Semiconductor     VSEA          $29.29        $28.08
Semitool                 SMTL          $10.88        $11.37
Ultratech                UTEK          $16.42        $24.48

Cymer                    CYMI          $35.51        $45.44
Photronics               PLAB          $15.06        $18.76

Brooks Automation        BRKS          $12.57        $14.24
Asyst                    ASYT          $ 6.16        $10.41
Entegris                 ENTG          $ 9.42        $10.64
MKS Instruments          MKSI          $17.89        $23.43
Advanced Energy          AEIS          $11.83        $14.13

ATMI                     ATMI          $27.97        $30.20

Advantest                ATE           $25.38        $29.37
Teradyne                 TER           $14.57        $15.51
Kulicke & Soffa          KLIC          $ 8.84        $ 9.54
Cohu                     COHU          $22.87        $21.22 

Amkor                    AMKR          $ 5.55        $ 8.64
ASE                      ASX           $ 4.49        $ 4.66

Cadence                  CDNS          $16.92        $18.49
Synopsys                 SNPS          $20.06        $22.35

Yes, this is follow-up to a post detailing last year's performance for the same group of stocks: http://www.infras.com/2006/01/are-those-bull-snorts.html Notice any patterns here? AMD and Intel have swapped places. Intel is fumbling around right now - this quarter is not looking very good. Micron is moving higher most likely because of the changes in strategy - more Flash production (through the relationship with Intel) and their bid for Lexar. Expectations that more DRAM demand will develop when Vista rolls out is also keeping investors interested. TI held steady this quarter - strength in analog and cell phones is driving their business. STMicrolectronics, Maxim and Analog Devices were up ever so slightly - the latter two being driven by strength in the analog business. Only Lam and Ultratech gained significantly out of the capital equipment group. Obviously investors do not believe the good business environment will hold together . The *forward looking* view fits right along with the "Faint Echo" post I made on January 20: http://www.infras.com/2006/01/faint-echo.html Seasonal shipment and ordering patterns are still in play. Lithography players, Cymer and Photronics, did very well. Photronics is being pushed by high levels of design activity while Cymer is *the* company in DUV immersion lithography. How many slots are out there for these very expensive immersion scanners? Not enough. Estimates seem high so the bet here is that the stock pulls back over the next quarter. Good moves were made by the subsystem component suppliers. Is there much more upside? Asyst was downgraded today. The concern here is that we are near the seaasonal peak. If front end equipment bookings start to weaken these stocks will likely give up some of their gains. Materials are still a hot area and a favorite. ATMI was volatile during the month and MEMC (not listed) is moving strongly higher. MEMC is being driven by increased polysilicon demand (for solar) and tight wafer supplies. With ATMI, the number of new materials that are being integrated into sub 90nm processes continues to grow. That's the good news. The bad news is that it is becoming more and more difficult to integrate these with the manufacturing process. Lots of debate here. Those that run leading edge fabs will tell you that new material integration is moving right along. If you ask the equipment vendors and the materials companies (including the chemical and gas analytical labs), they will tell you it is chaos out there. Lots and lots of issues. Test, Assembly and Packaging issues performed nicely. Advanced packaging and the challenge of testing devices with multiple levels of functionality is driving this arena. There are also capacity shortages that need to be addressed. One issue here is the cost of test - it's going up and up and up. Business at the subcontract houses, Amkor and ASE, is being driven by the explosion in IC unit volumes. There's a question about this though: Can they generate enough earnings to push the stocks higher? Margins are an issue. I'm also watching out for the dreaded inventory build. My ear is to the ground on this one.... EDA houses (Synopsys and Cadence) are looking good. I like them as long term plays. ------------- Can I tell you where the stocks will go over the next few quarters? Not exactly. I can tell you that seasonality in shipments and orders will definitely impact investor behavior. If the script plays out as it has in the past one should expect business activity to slow down. Typically the slowdown starts in the middle month of 2nd quarter and extends all the way to end of the 3rd quarter. Other issues: "Selling in April and buying back in October" is something a number of tech strategists are talking about. With the Vista delay and Intel's new product line-up being rolling out at the end of the year this tactic definitely has some merit. Then there's the impact of options expensing - a negative, of course. Message here is to keep your guard up. Don't be afraid to book profits.

No Price Wars?

Give the chart below the hairy eyeball and then tell me there is not pricing pressure in the IC industry (click on the chart for a larger version): Maybe I am hallucinating (again) but it looks to me like IC average selling prices are breaking into new territory. Gosh, one might even suggest this little excursion will get more pronounced as the overhead comes out of Flash Memory. I'm still working on those charts I mentioned yesterday. Will get them to subscribers ASAP. Comments and questions are welcome.

Regional Breakdown of Capital Equipment Market

The 2005 regional breakdown of total semiconductor capital equipment bookings, as detailed in SEMI's SEMS database, is shown in the pie chart below: 61% of all bookings last year were from companies based in Japan, Korea and Taiwan. China is still a small part of the overall picture. $30,104,641 was the total bookings level for the industry in '05. We've heard that bookings have moved up substantially in the most recent quarterly reporting period although there are a few indications that the pace of growth is slowing. I was told that by two people from the industry this afternoon. Add a hair more than 20% to these numbers and you get the same level of equipment bookings recorded in '04. Is that possible? Clearly the first half of this year looks decent. It's the second half that is really questionable. I'll pull together some more charts this evening and post them at the site for subscribers tomorrow morning. Those charts will portray more granularity. Equipment areas that will be charted will include: Mask/Reticle; Wafer Manufacturing; Wafer Process; Expose and Write Equipment; Resist Processing; Etch; Surface Conditioning and Dry; Thermal Processing; Ion Implant; CVD; Sputter (PVD); Inspection and Measurement; Assembly and Packaging; Fab Facilities; Test (Memory, SOC and Logic); Test Related Equipment. Feel free to subscribe if you want all the data. Subscription links are on the left and here: http://www.infras.com/monsub.html

Model Portfolio Changes

Model Portfolio Changes First day of March... Time to start trading like a Lion. Posted a few trade suggestions in the Model Portfolio section this evening. We'll be making some other adjustments during the coming days. As I mentioned in my last post these are "Anxious Moments" for investors. A few more sell-side analysts have moved to the dark side and there is news that demand may not be as strong as orginally anticipated. The wall of worry is pretty high these days. The hunch here is that there is another run to the upside.

Anxious Moments

Anxious Moments Typically I do not promote front page news sites but for some reason today's quick glance through the headlines and stories over at Silicon Strategies seemed to generate a nice frame for some big picture analysis. Here are a few thoughts, crammed into a nutshell: IP alliances are going to be big this year. Probably bigger than last year. Patriot Scientific? There's nothing like an old IP library coming out of the blue! Add these two ventures to the mix: TEL and ATMI; Cymer and KLA-Tencor. On the opposite pole, wars will continue on the IP front. Micron and Rambus - an on-going story. There will be an endless debate about demand for Flash and the shift in production capacity away from DRAM. Does that story ever end? Today's notes out of SPIE tell the tale about the lithography world. We've had an on-going discussion about litho in other areas of this site so it should not be surprsing to read that the implementation phase, at least for several technologies, seems to be stretching out. By extension, one might suggest that the struggles in litho means other areas need to be strengthened. Metrology? How about better materials? Ahh... Another day, another batch of headlines.... ------------- For most of the day eyeballs here have been focused on the action in the stocks. Good news is greeted by skepticism. Odds are pretty good the action in the stocks pushed some of the sell-side analysts over to the dark side. What's interesting about this is that during the same week one of the larger, well-known industry forecasting firms, Semico Research, was raising their industry estimates. A positive forecast is nice to see but to make money we have to listen to the market. I've talked about forecasts in some of my posts. At this very moment I don't want to fight the optimistic tone from those in the business but at the same time I believe a lot of the strength can be explained by the seasonal tendencies of the industry. Frankly, those patterns are almost too obvious. Whether or not this year ends up being front-end loaded or one that rockets into '07 the longer term questions remain: "How much leverage will it take to drive share prices higher? For these companies to really make money what level of business is required? Is +17% growth in the semiconductor industry enough?" Anxious moments for investors...

Blast From The Past

Blast From The Past Amidst all the news today one announcement caused us to look at the past. Kulicke & Soffa (KLIC) announced the sale of their test division. From the press release: -- K&S has signed a definitive agreement to sell its wafer test assets to SV Probe, PTE, Ltd. -- K&S has also signed a definitive agreement to sell its package test assets to Investcorp Technology Ventures II, L.P., which is managed by the Technology Investment Group of Investcorp, a global investment firm. K&S invested $290 million to enter the test business. $225 million in cash to buy Cerprobe and then on November 14, 2000, the company announced that it has also signed a definitive agreement for a $65 million cash acquisition of privately held Probe Technology Corporation. What did we say back when K&S made their entry into the test business? Here's a bit of the commentary: "So, what we believe will be necessary is for K&S to quickly build critical mass in the established markets, efficiently integrate the organizations for operating leverage, and invest heavily in a technology strategy that enables finer-pitch wafer probing." The full story is still here at the site: http://www.infras.com/klic.html From what we understand K&S is going to get $27 million from the sale of the test division. Obviously that is not a very good return - and it does not include the 5 years of losses posted by the unit. Ahh... Hindsight is 20/20. Shoulda, coulda, woulda. Acquisition Integration: It's been a thorn in the side of the chip and chip equipment business for a long time. A number of companies are working very hard to adjust the mistakes made in the past. Hopefully some lessons have been learned. Are you enjoying the rally? I am and it seems as though Mr. Market feels good about the sector. Then again, it does not pay to be greedy with chip stocks..... Keep your guard up!

A Faint Echo

A Faint Echo That echo I am hearing is the winter months of '04. This was definitely an earnings, news, and data week that set the table for the rest of the year. There was nothing really surprising on the business front. And that includes the news involved with the semiconductor and semiconductor capital equipment companies. Early in the week I e-mailed my friends a list of things I'm monitoring this year. The list is relatively long and the subject matter is wide ranging. Advanced semiconductor fabrication, nanotechnology, all the way to the evolution of Municipalities considering WiFi networks. On Top of that list: Forecasting. Forecasting the growth rate of the semiconductor and semiconductor equipment business and the action in the stocks. It's 12:52CST here right now. As I write this the Dow is down more than 155 points and the Philadelphia Semiconductor Index (SOX) is down about 3.5%. Yes, it is options expiration day and weird things happen but those drops are fairly sizeable. Didn't the market hear all the good news this week? Had to. Then there's the echo.... The echo tells us to go look at some earnings reports for semiconductor and semiconductor equipment companies in January '04. Hmm.... Outlooks and orders were moving in the same direction they are today. Certainly there are a few differences but none profound enough to scrap the comparison. Second, and very much related to the action in today's market, look at a chart of the SOX and some of the big name chip players during the winter of '04. Ahem... Are we peaking? Has the market priced all this in? What's going to move the group higher? Would it take another +25% jump in business activity, like what happened at Lam Research, to keep things moving up? Is it time to call a top? The action in the market certainly has me thinking.

Are those Bull Snorts?

Are those Bull Snorts? Can you hear the snorts from the herd? The pawing of hooves? Bullish technology forecasts are flying around everywhere. You don't think so? The Philadelphia Semiconductor Index (SOX), at the time of this posting, is attempting to make a new 52 week high. Are we really off to the races? All systems go? The coast is (finally) clear? Well, starting the year with a bang is not all that bad. Have to admit, last year's equity performance was about as exciting as watching paint dry. Here's a quick run down on the performance of a few prominent names:

Company                 Symbol      '04 close      '05 close 

Intel                    INTC          $23.39        $24.98   
Texas Instruments        TXN           $24.62        $32.07   
Micron                   MU            $12.35        $13.31
Advanced Micro Devices   AMD           $22.02        $30.60   
STMicroelectronics       STM           $19.32        $18.00           
TSMC                     TSM           $ 9.91        $ 8.09
Analog Devices           ADI           $36.92        $35.87
Maxim                    MXIM          $42.39        $36.24

Applied Materials        AMAT          $17.10        $18.49
KLA-Tencor               KLAC          $46.58        $49.33
ASML                     ASML          $15.92        $20.08
Lam Research             LRCX          $26.35        $35.68
Novellus                 NVLS          $27.89        $24.12
Varian Semiconductor     VSEA          $36.85        $43.93
Semitool                 SMTL          $ 9.28        $10.88
Ultratech                UTEK          $18.85        $16.42

Cymer                    CYMI          $29.54        $35.51
Photronics               PLAB          $16.50        $15.06

Brooks Automation        BRKS          $17.22        $12.57
Asyst                    ASYT          $ 5.09        $ 6.16
Entegris                 ENTG          $ 9.95        $ 9.42
MKS Instruments          MKSI          $18.55        $17.89
Advanced Energy          AEIS          $ 9.13        $11.83

ATMI                     ATMI          $22.53        $27.97

Advantest                ATE           $21.40        $25.38
Teradyne                 TER           $17.07        $14.57
Kulicke & Soffa          KLIC          $ 8.62        $ 8.84
Cohu                     COHU          $18.56        $22.87 

Amkor                    AMKR          $ 6.68        $ 5.55
ASE                      ASX           $ 3.45        $ 4.49

Cadence                  CDNS          $13.81        $16.92
Synopsys                 SNPS          $19.55        $20.06

The '05 results, for many on this list, are nothing to jump up and down about. Honestly though, I don't think the mixed picture is the least bit surprising. Yes, throughout the year there were periodic flurries of activity on both the positive and negative side. I know a number of investors have been successful trading in and out of these (and other) issues. So, Bull or Bear? Color me this way: Friendly on a few of the industry trends. When it comes to the stocks, it really depends on the company. What I am listening for this year when I meet with companies is an emphasis on long term strategies - strategies that increase shareholder wealth. I know, that's something that should be a given but when you look at what has happened over the past few years chip and chip equipment companies have not been shareholder friendly. The little table detailing '05's performance only scratches the surface. The plan here is to do some major housecleaning. Our rather "idle" Model Portfolio - the one that actually beat the markets in '05 - is going to become brutally selective. Fundamentals will drive the decision making process. ------------------ During the the past few years I've talked about the transitions that companies in the chip industry are facing. This phase is not over by a long shot. A calendar movement is not going to make the challenges disappear. In fact, the pace of the industry's "rationalization, reorganization and restructuring" is intensifying. Don't expect things to become any less confusing. I'll be posting a lot and tweaking the site over the coming days. Drop me a note if you have any questions or comments.