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Get Four
|  | DECEMBER 5, 2005
Stocks Marching to an iPod BeatThe phenomenal growth of Apple's music player and other tech devices is good news for chip outfits, says S&P's Thomas SmithCell phones and iPods are everywhere -- and that's good for semiconductor makers and thus for the stocks of those companies, says Thomas Smith, Standard & Poor's analyst of stocks in the semiconductor sector. Shipments of cell phones are up a surprising 21% this year, according to Semiconductor Industry Assn. figures. That's a boost for the makers of NAND flash memory, with iPods and cell phones putting "a premium on certain kinds of flash memory that retains information and turns on with instant information access," says S&P's Smith. One interesting play on NAND memory is the recent infusion of capital by giant Intel (INTC, an S&P buy) into Micron Technology (MU, a hold) so that Micron can accelerate its development of NAND memory. Another area of chip demand related to the new products is in power-management chips, which allow better management of battery life. Companies making these include International Rectifier (IRF ), Analog Devices (ADI ), and Linear Technology (LLTC ) -- S&P ranks stocks of ADI a buy and the other two as hold. Other buys on Smith's list include Intel, Microchip Technology (MCHP), and Nvidia (NVDA ). These were among the comments Smith made in an investing chat presented Nov. 29 by BusinessWeek Online and S&P, in response to questions from BW Online's Jack Dierdorff and Karyn McCormack. Edited excerpts follow. Note: Thomas W. Smith is an S&P Equity Research analyst. He has no ownership interest in or affiliation with any of the companies on which he writes research. All of the views expressed here accurately reflect the analyst's personal views regarding any and all of the subject securities or issuers. No part of the analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this chat. Tom, semiconductors are a crucial part of the tech sector -- how have the stocks you track been doing as the market inches back up? The semiconductor sector has been moving back up with the market -- and outpacing the overall market…. As of last Friday, the semiconductor subindustry was up 13.8% year to date, vs. a 5.2% gain for the S&P composite 1500. Overall, the semiconductor companies reported relatively strong earnings and were mostly able to guide higher through the November earnings reports, which indicated a bullish tone for the group. The trade association, the Semiconductor Industry Assn. (SIA), put out a new forecast on Nov. 16, which slightly raised its outlook for global industry sales in dollars for 2005. And it's looking for an 8% growth year in 2006. Tom, what's your recommendation for chip stocks? Our overall outlook for the industry is neutral... I see the overall demand situation as neutral in terms of the GDP outlook we have for 2005 and 2006, and also for the demand for chips. We're looking for chip growth of about 9% in 2006, which would be a normal year for chips. The inventory levels within the industry are very bullish, in our opinion -- that is, the level of inventory in the distribution channels is low and needs refilling. Also, the utilization of wafer-fabrication plants is low, according to the SIA. So things are hot, but they could get hotter. I look at that as bullish for the industry. When companies describe their order lead times -- another indicator of where things are heading -- lead times are described as generally short but are beginning to lengthen for some types of chips. When order lead times become very long, people are ordering for a future time frame, and things are hard to get, and things are getting hot. The p-s [price to sales] ratio for many chipmakers is below the recent historical average for these companies. However, analysis by price to earnings is difficult to do at this stage, because stock options are going to be included in earnings beginning in 2006. So what are some of the chip stocks that look best now? We rank Marvell Technology Group (MRVL ) 5-STAR (strong buy) right now. They're succeeding in some sophisticated designs for broadband data transmission and wireless data transmission, and seem to be able to command premium pricing, and are developing a good niche in the broadband area. It has shown growth well above the semiconductor industry for several quarters, and we expect it to continue to do well over the next 12 months. Other chipmakers we like with 4-STAR (buy) ratings include Intel (INTC ), Analog Devices (ADI ), Microchip Technology (MCHP ), and Nvidia (NVDA ). Briefly on those, Intel is the industry heavyweight and something of a value play compared to the others. It carries a relatively high dividend [among chipmakers]. It carries some long-term debt, but we see that as negligible in the context of the size of the operations. Intel needed more access to NAND flash memory and decided to partner further with Micron Technology (MU ) (a 3-STAR hold). Intel has gotten capital over to Micron so that NAND flash development could be accelerated. We view this as beneficial to both companies. ADI is a play on digital-signal processors and high-end analog chips. These chips are used in a wide variety of sophisticated consumer and industrial electronic devices. They're a leader in DSP chips used in telephone handsets, and we view these all as promising growth markets. Nvidia is a maker of high-end graphics chips for digital entertainment and workstations. Nvidia's fortunes are often tied to tight competition with its single competitor, ATI Technologies (ATYT ), which is not covered by S&P. Sometimes their near-term results can be seen as a sort of seesaw in the battle with ATI, which investors should consider as potentially risky. In recent months, Nvidia has been performing better than expected, and we expect it to do better on margins. Microchip Technology is the maker of a low-cost chip known as a microcontroller that's used pervasively in all kinds of electronic goods, and it has the ability to make chips in low-cost fabrication plants and a record of persistent market-share gains. Microchip also pays one of the larger dividends in the semiconductor group and has no long-term debt. (Nvidia also has no long-term debt.) I should also mention that Cree (CREE ) is a 5-STAR (strong buy) -- they're covered by a colleague.
BW MALL
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