Wednesday, June 17, 2009

Gartner: Strategies for Recovery

Gartner presented their "Strategies for Recovery" at a Silicon Valley briefing this week.

Color me, jaded. Yeah, I know. I've earned a charter membership to that club.

I've been hosting a pretty good discussion about this session on the subscriber mailing list and I am hoping to land a copy of the presentation(s). Assuming my contact loads my in-basket, I will spend a bit of time giving the slide decks the hairy eyeball to see if any stunning insights were unveiled. Even if I don't land them there's plenty of notables in the article. Have a go!

As for my thoughts, I'm still trying to conjure up the urge to grasp the nettle. A fleeting thought was to publish a critique and litter it with a series of "turning point" titles that have paced the most recent semiconductor cycle. I have yet to decide about doing such a thing but I do plan to ask others for some insight - primarily because there are, no doubt, folks in the trenches that can dissect this and provide some solicitious, cogent and timely observations.

One thing that might be cool is to create an analog to Gartner’s (Dataquest) ground-breaking mid-1990s, recently updated in '05, Hype Cycle Chart:

While I was pondering all this a good friend wrote in and suggested that now is just about the perfect time for titles like these to appear on the scene: "The Light at the end of Tunnel (Sunlight or oncoming Train?)”, and one that is certainly not to be out done “It’s Darkest just before Dawn”. We could add a piece from Gus Richard, who currently hangs his hat at Piper Jaffray. He released the unforgettable “Acapulco Cliff Diving” which, to some extent, would seem to book end neatly with Gartner's amorphous, benignly non-committal title, “Strategies for Recovery”.

It's hard to say where it would fit but my Associate also suggested an all time favorite that came from an October '04 issue of Strategy Alert titled, “Technology, The Maggot Race Begins”. He's right on one count, only a British national could show such mastery of the English language.

Without going into a lot of depth I will say that parts of the "back to basics to stay in business", particularly the part that argues against the use of debt, flash mightily. When you get right down to brass tacks, no debt means there will be no new fabs. Unless, of course, you are Intel, Samsung or TSMC.

Yeah, I could make note of a few other things about this and some stuff (Brooks Instruments purchasing parts of Celerity for one) that are taking place on the business front but......

.....for some reason my head is all messed up. Trust me, there will be another time.

A very quick side note... I sent a message out earlier on this and received a call from a big OEM who, if I recall correctly, stated that Gartner is forecasting a 0.4% CAGR for the semi-industry over the next five years. Ouch!

Thursday, May 21, 2009

Attending Semicon West?

If you are out surfing around check out the poll over on LinkedIn that asks if people will be attending Semicon West this year. Results are here (you might have to log in to see this):

I've heard from several people that booth count is going to be way, way down and that the semiconductor section is now going to be in the South Hall of the Moscone Center and InterSolar will be held in the North. Talk about shrinkage! Whew!

For what it's worth, my LinkedIn profile is here:

Tuesday, May 19, 2009

Business vs. Stock Recoveries

You've probably read about it yesterday but yet another sell-side analyst upgraded a group of SCE companies. I have to tell you my friends in the business are very cynical about this. And yes, I know that Kulicke & Soffa (KLIC) stated that their business has picked up and that they are often noted as a canary in the coal mine for the chip industry - which, by the way, was a designation they were pegged with right here many, many years ago.

During our discussion of the upgrades one grizzled industry veteran shared the following:

In my opinion the equipment market will turn up when all the following happens (in order)

1. Chip makers see enough upswing in orders to actually turn on unused tools
2. Chip makers stop taking parts from unused tools and are forced to buy new spares
3. Chip makers unwrap tools still in crates and begin to use (dirty little secret of the industry)
4. Chip makers get marginal utilization of 80%
5. Chip makers actually make money at 80% utilization rate
6. DRAM makers keep their pledge to shutter unprofitable fabs and don't decide to give them one last shot.

....then the equipment guys will see enough orders to warrant an uptick in their stock.

The history of what it takes to move stocks and what it takes to move the semiconductor cycle have increasingly become different things. I'm not going to question whether or not the stocks will lead the cycle - they will - but most likely after numerous false starts. If you are driven to invest based on fundamentals that is not good enough. All one needs to do to see that as the case is to note the "buy them for the turn" table pounding that has been going on for the last two years.

The question then becomes: "By how much should the stocks lead the cycle? 6 months, 12 months, 24 months?"

If you are trading the beta, at least the bit of beta that remains in the stocks, it doesn't matter. If you are taking a little longer term approach and actually investing for a cycle play then it does.

Here are a few more questions and thoughts we've been discussing on the mailing list:

Is the worst over?

Coming from near zero, I’d say yes. This cycle is very different for a host of fundamental reasons and though we are getting a bounce off the bottom it doesn't tell us anything about the shape of the recovery.

Will the industry even get close to peak margins again? That's highly doubtful. Looking up and down the chain suggests that a weakened semiconductor business will continue to weaken the capital equipment business.

Which brings you to another set of questions that will hover over the industry as this cycle (if you want to call it that) develops: Are there more consolidations ahead? For what reasons, and what companies?

Yeah, this could go on all day. The sense here is that even more realities will surface in the next few quarters. That should make for a very interesting summer in semiconductor land.

Wednesday, May 06, 2009

Today's weak analysis winner is....

Today's weak analysis winner is....

None other than Rick Whittington! Mr. W and his $17-regression-line-based-EPS-extrapolation for Micron back in '97 will stand in infamy as one of the all-time classic analyst outputs.

How soon we forget.

Today's piece, published in the Intelligent Investing (ahem) section of Forbes, ranks right up there! Containing only a couple of numbers Mr. W. makes a bold proclamation about the prospects for semiconductor stocks: "They've now bounced back about 55%, but history suggests another doubling."

Doesn't that sound great? I'm so excited. Should I go ALL IN?

The other number is just about as useful as the first: "This past year, U.S. companies picked up 5% of market share to 53% of global chip output."

Sounds peachy! Although, on second thought.... Some input as to why this happened and who the beneficiaries are might be helpful....

Arming the Forbes reader with these two iron-clad data points, a few clips about the history of semiconductor industry cycles, a less than heartfelt and data-less dart toss toward some minutely positive economic data, some verbal diarrhea about the plethora of uses for semiconductors, the fearless Mr. W concludes his missive by suggesting the purchase of three stocks.

Three stocks that he admits owning.

Allow me to say that I don't have an issue with the fact that semiconductor devices will continue to proliferate. All those things mentioned, the internet, broadband, wireless, media, security and a host of applications we haven't even thought of will drive growth in semiconductor content. Those that are remotely close to the industry, followers, investors and insiders, know all about this. It's going to happen. Clearly Mr. W. is not preaching to this group. This is the kind of stuff you hear in taxis, bars and coffee shops.

What I would like to see in conjunction with the previously mentioned fact is some solid, non-mo-mo, financial justification for owning the stocks. How about some metrics to assess present and future valuations? If one can not provide a suitable set of financial metrics one should, at the very least, qualify the recommendation by admitting that the vast majority of companies in the semiconductor space are beta plays. Invest in them using techniques you use to play video games. Nothing more, nothing less.

In a nutshell, when I read a piece like this it really jerks my bobber. And no, I did not wake up on the wrong side of the bed!

If these deeply profound and pithy observations appeal to your investment senses then by all means click the following link and read the rest of the story:

As for me, I'm personally going to dig a little deeper and do some research on the earnings prospects for the business - right after I give myself a swirly.

Oh! And if you are serious about investing in the sector and interested in getting any of my research feel free to subscribe to my mailing list. Details are here:


Wednesday, April 15, 2009

Top Ten+.... Revisited!


Okay, this is a revisit but because we are in the throes of earnings season some of these thoughts are worth repeating. This particular note was sent in early March and got passed around quite a bit. Eric Savitz called it a "Magnum Opus".


Opened yesterday morning's e-mail with stories from Institutional Investor Magazine and what do you know? Right up front there's an article where JP Morgan semiconductor analyst Chris Danely serves up ten rules for investing in technology/semiconductor stocks:

Boy, talk about great fodder.

After discussing this list with several investment friends I thought it would be fun to pitch in a few comments along with a few more insights. As you read this please note that the Top Ten Rules from the article are italicized. My comments are in bold letters. Just so you know, no holds were barred in the production of this message.

And here we go:

1. Don’t ever Buy or Sell a tech stock based on valuation. Tech stocks are still largely momentum investments. They go up if the estimates are going to go higher and go down if the estimates are going lower and seem "cheap" prior to a blow up, and "expensive" prior to a run up.

---- Technology stocks, when they fall from favor, trade on valuation. Sadly those valuations tend to be very, very low. With the demise of the hedge funds the above strategy may be mitigated.

2. Exchanging higher revenue growth for lower margins never works. The reason many tech companies have such high multiples is the high margins and high cash flow they generate. When margins go down, multiples go down, ergo, stock goes down.

--- To reiterate; It never works. For most companies lower margins are inevitable as the industry matures.

3. Lead times going out is good. Lead times coming in is bad. These are two occurrences tech companies will deny, deny, and deny ’til the cows come home. They will insist that there is no double ordering when lead times stretch out, even though their customers will openly admit it. They will also try to say their customers will not cancel orders when lead times come in.

--- Agreed, although some interesting balance-of-power issues have surfaced as the food chain has required the semiconductor vendors to hold more inventory.

4. Very rarely is "it’s different this time" a good rationale for investing in tech stocks. I can’t count how many times I’ve heard: "Inventory is better managed" or "Our biggest customer just blew up, but we’re fine." In over a decade of covering tech stocks, VERY RARELY is it different this time. The reason? Human nature is difficult to change.

--- Except it is really different when the world goes into a credit crunch.

5. Technology company management is ALWAYS bullish. Tech company managements are often founders; they work very hard, and have a huge amount of skin in the game. The company is their "baby." Case in point, my mom still loves me after I put her through hell and beyond for the first 25 years of my life.

--- Yes, pathologically so.

6. "Looking through a tough quarter or two" never works. When a tech company blows up, the negative estimate revisions are usually much greater than anticipated.

--- Looking through a tough quarter or two refers to the hopes of the analyst with a buy on a stock that is sinking. It also shines a spotlight on the diminishing propects of a bonus in quarter or two.

7. Intel stock usually follows its gross margins. I have charted this axiom of semi investing back almost 20 years, and it still works.

--- Why? Because with huge capital intensity, small changes in revenues and profits are amplified due to the fixed costs of depreciation and amortization. (Tick-Tock)

8. When a technology company says, "Our revenue growth will come from the Medical or Healthcare end markets," what they’re really trying to say is, "We have no revenue growth." While electronic content is increasing in both applications, the number of units are tiny compared to cell phones or PCs.

--- Yes. The only exception is if they mean they are selling drugs.

9. It's never "just a one-quarter problem." When a tech company blows up sometimes you hear, "its just a one-quarter problem. Business will be back to normal soon." Technology stock corrections are at least two, if not three quarters of sequential declines, even worse when share loss is involved.

--- The one quarter problem is more usually spoken by the analysts and not company management. See #6 as to why.

10. If a tech company either has or supplies into a hot-selling product, consensus estimates are usually way too low. Product cycles never cease to amaze me at how strong they are and how many people will buy the truly revolutionary products such as iPods, cell phones, BlackBerrys and digital TVs.

--- Yes, sort of. Estimates are often too low but beware of customer concentration. When that product comes off its growth trajectory, or the client finds a lesser cost supplier, you will find you need a corollary to further define that ditty.

And just for kicks, here are a few more that could be added to a technology investors toolbox:

11. For an analyst it is normal and expected to be, "Seldom right but never in doubt."

12. When in doubt about issuing a recommendation err on the side of a buy. This is the sell-side credo of professional longevity.

13. In a cyclical industry, it is difficult to be faulted by positing, "It’s never too early to buy."

14. Management can give accurate guidance in an up cycle because the selling funnel is a good leading indicator and production can be efficiently planned for.

15. Management is lousy with guidance in a down cycle; salespersons are optimistic by nature and thus move from excellent to poor indicators without notice. Management, driven by stock options, are loathe to admit a downturn and slow to take corrective action.

16. Management, as a matter of policy, will let the Street tell them it’s a downturn.

17. Charges and write-offs do wonders for future earnings.

18. Stocks seldom recover from the $5/share line-of-death. Those that do make for very rich returns. Gamblers’ dilemma.

19. Watch asset management metrics like inventory, receivables and payables. They give good clues to the ability of management.

20. Few companies can grow at rates above 10% or 15% for very long.

21. Compare cash generation with earnings. Disparities are telltales.

22. Competitors will give you more information about the soft-under belly of subject company than company management.

23. Most analysts have some value, and no analyst has it right all the time. Think, reason, and extract value from those selective strengths.

24. Inside information is illegal. It is also an excellent source.

25. Talk to customers and customers’ customers.

26. Ask the analyst how they derived their estimates. What drives revenues and margins? How does the company outperform GDP?

27. Ask the analyst what they know that the Street doesn’t.

28. Technology M&A is rife with problems. It is almost always bad for the predator and good for the prey.

29. Know what the M&A motivations are. Expanding into new markets can foretell that management is concerned about current market.

30. Technology companies that are doing extraordinarily well are subject to rapid turns in performance. Do not become complacent.

31. The business is about relationships. Smart, informed people are good sources no matter where they are. These people can be surprisingly helpful long after they leave a researched company. And even if they are no longer connected, friends are good for the soul.
I could go on.....

Lucky for you I have to go tap some Maple trees!


P.S. A hybrid of this list was published over on the Barron's Tech Trader Daily blog. Here are the links:

2nd Half Rally?

Over the past few days, right here in the midst of earnings season, I have had considerable discussion with semi industry folks about the bullish forecast from IC Insights - the pent-up demand part. If you have an interest, there's a story over on the EE Times website that talks about the forecast.

I realize inventories need to be rebuilt but the weakened financial state of corporations and consumers will have a significant impact on final demand. I fear, unless there is a "killer app" lurking in the wings, the strength of end demand will not be as healthy as it has been coming out of past down cycles. This is merely a product of the macro-econ equation. Today, the data I see on that front makes a huge recovery very questionable. Believe me, I'd love to say that the "stimulus" is going to work but frankly I don't find precedents that suggest *spending your way out of the downturn* is the approach to pursue. Personally, and I believe I have made this clear in past musings, we are tossing around good money after bad. Until we reign in spending, which also includes the bailout programs, I have my doubts about a sustainable upturn.

Sadly the mathematics of stimulative spending don't work. Sure, the $2 trillion Bill cites in his missive will bring extremely short-lived and fleeting "benefits", if it brings any benefit at all, but when one considers the scope of the current plan(s) our country runs the severe and immediate risk of pushing the "contribution to GDP per dollar of debt" value into negative territory. Call it, "pushing a string" - I'm lacking a more eloquent description but that's what it appears to be.

Here's a fascinating chart that shows the declining impact of Newly Issued Debt on US GDP (sorry for the fuzziness):


Clearly the ratio of Debt to GDP must come down to sustainable levels so that the contribution that debt makes to GDP rises, avoiding the disastrous circumstance where a new dollar of debt creates a negative impact on GDP. This means difficult choices must be faced -- and part of building that foundation must be the clearing of unsustainable debt through default.

At this point this discussion is moot because we are going to try and spend are way out of these problems... And that brings me back to some comments and a question I wrote to a friend about the "stimulus" yesterday. Perhaps someone can answer this: Will there be, or is there already, a public listing anywhere of the science/applications/infrastructure projects, the awards and the amounts earmarked for stimulus spending? And of equal interest, is there a list of those sciences/applications/infrastructure projects that have already been deemed unworthy or outright denied? Speaking from a business strategy perspective it strikes me that a summary like this would be very useful in finding what should and what should not be pursued.

Of course, any info like that would have to be placed in hands that might actually pursue those opportunities. That's another story in and of itself.

Ramble off - at least for now....

Tuesday, April 07, 2009

Wealth Destruction

Was having a discussion with an old friend from Merrill Lynch and he mentioned the awesome "Wealth Destruction.." that has left him feeling numb.

It has really been something hasn't it?    I feel like ranting... Bear with me.

The Government's approach to addressing the root causes of the financial crisis have, thus far, been totally inadequate.  Market realities are slowly forcing us towards obvious prescriptions but acknowledgment and appropriate action is taking place at a glacial pace.  Sadly, I don't think we have the time - or money - to waste.  Issues of politics, perception and partisanship have to give way to pragmatism before it is too late.  If only our legislators could shed the shackles of short term remedies we as a country, and as a people, would be far better off.

I hate being so pessmisstic but like most, I get sick to my stomach when I read/watch the news. Today we see the Financial Accounting Standards Board (FASB) - the supposedly "independent" rule-making body of the accounting profession - and the US Government are in almost perfect sync.  One week the FASB relaxes FAS 157 - the mark-to-market standards applying to financial asset portfolios - while the next brings the Treasury Department's release of bank stress test results.  No doubt the Treasury has tremendous latitude in how it reports the results of the stress tests, and if it chooses it might well incorporate the expected benefits of the "new" FAS 157 on bank capital balances.  This is manipulation at its finest because it would have a PR impact of showing banks as being much healthier than the former accounting regime would indicate.   That regime is the one that forces banks to deal with the reality of where their assets would clear the market.   And while naysayers would have you believe that marking-to-market assets which are intended to be held until maturity is harsh, I'd counter with this simple question:  Does the bank have the term capital, and, therefore, the ability, to fund these assets until maturity?  If the answer is no, which is invariably the case given the massive size of bank illiquid asset portfolios relative to term capital, then marking-to-market is the prudent way to reflect its true financial position.  The US Government is conveniently staying silent on this part of the debate.  But what else should we expect?

Check this table out from a piece in a Goldman Sachs report a few weeks ago (click for larger image):


Doesn't appear that a lot of stuff has been marked down appropriately.   I've got tons of stuff like this on my hard drive - one presentation I was viewing from T2 Partners a week ago chased me off the computer and to the local pub.   (just kidding)

Alas, the business at hand is that of manufacturing outcomes regardless of their basis in reality. Once reality sets in, the reality that deals with market values, financing terms and solvency, the pretty picture that has been painted won't look so good.

But hey, things are OK for now, right? As Vonnegut so often noted, "So it goes."

Impact of Netbooks

Earnings  season.....   Oh Boy!   The deluge is about to begin.

Last week, actually  on April Fool's Day, there was an article in the NYT that talked about the  trends in the portable computing world:   Light and Cheap, Netbooks Are Poised to Reshape PC Industry.  Notable were the comments from Intel's  Sean Maloney:   “When these things are sold, they need clear warnings labels  about what they won’t be able to do,” said Sean M. Maloney, the chief sales and  marketing officer at Intel. “It would be good to wait and play with one of these  products before the industry gets carried away."

Hmm...   They've  really been downplaying this.   Makes you wonder.

In general, it's a timely product for challenging  times.  I believe, and this was noted in the  article, the rise of the netbook will have implications for margins.    I've attached two research reports related to  this for your consideration.   Back in February I made some comments  about the UBS report and sent them out but didn't get much feedback (seems to be a common theme these days) so, for posterity, I'm sending them along with a few minor edits.

My comments follow  the quoted (in blue) excerpts from the UBS report.

Friday, April 03, 2009

No Surprise: MKSI Pre-Announces

Subsystem component supplier MKS (Nasdaq: MKSI) pre-announced earnings for the quarter. No real surprises here. That said, I'll make a few comments.....

Conversations with a few industry friends have mentioned an interesting pattern. Here are some from a veteran of the business:

Smaller equipment orders, stuff at/under $50k, are getting pushed out or cancelled altogether. Visibility, it appears, is still a pipe dream. Many companies are still struggling with how to maximize cash conservation programs. Clearly the objective is to stretch reserves to a point where operations can be funded through CY'10. It is disconcerting to hear Sr. Execs discuss the possibility of this extending more than than 6 quarters into the future. This is a point that is driven home by yet another 20% RIF - a RIF initated by a management team that is held in very high regard.

For the time being it is apparent that the device companies are the only restock plays. While this is a good thing I believe those that are investing at current valuations are being pushed by the action in the market vs. a significant and lasting improvement in fundamentals. Access to reasonable indicators is important. With nice gains in two it is best to be disciplined and committed to move quickly if the market turns. Many analysts, even though they have "BUY" ratings on certain stocks, are very bearish on their conclusions. Much of this hinges around the weak state of end demand.

Good stuff from the insiders. Take it to heart.

Thursday, April 02, 2009

Economic and EPS FYI....

Call this, an economic FYI.....

At the bottom of this message you will find a compilation of comments from a portfolio manager. The comments speak to the disconnects we see in today's economic analysis. Believe me, I have wrestled with this stuff for years - headline interpretation vs. real analysis. You can see the influence of the former with the way the market is jumping around over the past few weeks. And yes, I know that the stock market was ready for a bounce - that happens even in the most bearish environments.

I don't believe we are out of the woods because we still have some real problems with recognition and acknowledgment.

Over the coming days I am going to send some comments on the semi, semi equipment and tech space. Earnings season is approaching and given the strength of the recent rally it is probably best to put out a look at expectations - certainly do not want any surprises. I've been wrestling with the longer term view for many of the semi and semi equipment segments these past few weeks. I realize there is going to be a pop in semi orders and that will drive some equipment business but longer term I get the sense that the business model really needs to change. There have been several articles published about the need for M&A to narrow the capital equipment playing field and while that all sounds wonderful a number of key issues have been glossed over. Why buy when companies are battling atrophy? The company shrink is going to continue for a while and though there are cases where synergies can be immediately realized I think the general thought process is to sit on your hands and wait it out. No one knows where the bottom will be and haphazardly throwing pieces together because you think you can build critical mass is just lunacy. Why reach for critical mass when your customer base is shrinking?

Allow me to reiterate that in most instances the "A" in M&A stands for "Attrition". Management teams have yet to downsize to levels that are close to sustainable. Again, I say this knowing that there will be flurries of order activity - particularly when factor in the very low pace of business over the past six months. There is bound to be a bounce. Thing is, a bounce is about all it will be. What happens after that? The days of companies announcing that they are going to build two, three, four or five fabs are over.

I hope you are all weathering the storm out there. I know it's a battle for everyone. If I can, I'm going to do some traveling during the coming months to survey the landscape. Hopefully if I am in your neck of the woods we can meet face-to-face.

Last but not least, thanks to all that replied to my Roll Call the other day. It's always great to hear from you.

The rest of this story is below the break....