Street 2009 View Still Too High for Semiconductors

by: Richard Davenport

EVENT: 64 US-Traded Semiconductor Companies: Revenue-Weighted F09 Street Revenues -14.9% Y/Y
CAUSE: Well-Known Macro Weakness; Lots Of Negative Supply Chain Data; But Estimates Not Low Enough
IMPACT: Q1, 2009 Guidance Likely Well Below Current Street Estimates; Our Best Case -23.0% Y/Y
ACTION: Continue To Avoid Semis, Distributors, Foundries, Semi Equipment

EVENT: STREET SEES 09 Y/Y SEMI REVS -14.9%. In mid-December, we used Connexiti to screen for Y/Y revenue growth for US traded semiconductor companies with a market cap >$100M, which produced 64 names (see Taking Stock: Semis Digging A Deeper Hole: Street 2009 View Overstated,
12.16.08). At that time, the Street was modeling 2009 Y/Y revs -12.5% for the group, while we suggested that a best-case scenario was down -20% Y/Y. Since then, the environment has worsened, and while Street Estimates have become modestly more negative (moving from -12.5% to -14.9%), our own
best-case scenario has been lowered from -20.0% Y/Y to -23.0%.

CAUSE: BROAD END MARKET WEAKNESS. With more than 50 US-traded semiconductor companies having warned in the month of December alone, semiconductor weakness is no secret. While many industry observers state that this weakness is priced in—to be fair, many stocks have recently been rising on bad news—our analysis suggests that Street revenue estimates are still significantly overstated. Once they become more reality-based, the earnings estimates from which they are derived will also come down, and hence earnings-based valuations for the group will lose any notion of “cheapness” they may now have. Intel's (NASDAQ:INTC) recent warning points to a deeper hole out of which semi revenues must climb.

IMPACT: 2009 STREET Estimates TOO HIGH. Our best-case scenario for semi revenues down -23.0% Y/Y is based on the following:

  1. With INTC’s warning, December results for the group are now largely set (although companies can still warn, most already have).
  2. Most companies have not yet given Q1 guidance. A few, like TXN, have: when TXN warned in December, it suggested that Q1 would be down “significantly” as well, more than the historical norm of -4.5% Q/Q, though “probably not as sharply” as Q4. Management stated that these two numbers could serve as bookends for how Q1 will shape up, so we assume the midpoint—a decline of -16% Q/Q. (Even for TXN, the Street is modeling just a -9.0% Q/Q decline in Q1.) We assume a TXN-like decline for the entire group in Q1.
  3. We then assume company-specific seasonal Q/Q rev growth for each company for the remainder of the year (Q2-Q4).

As we have had more than 20 semi companies warn since mid-December, our analysis now starts from a lower absolute level, and hence our best-case scenario for the group, based on the three criteria above, is down -23.0% Y/Y (vs. current Street -14.9%). We view our results as best-case because:

  1. Q1 is seasonally weak. While we believe TXN is a good benchmark due to its diversification, other off-cycle companies have already guided to lower numbers for the corresponding Q. NSM guided its Feb Q down -30% Q/Q, and SMSC guided its Feb Q down -43%. This initial trend is far below TXN’s midpoint of -16%.
  2. We assume company-specific seasonal Q/Q rev growth for the balance of the year, and there is nothing to suggest that this will yet happen.

So if we assume a 20% Q/Q decline in Q1—closer to what we already know from NSM and SMSC—and seasonal growth for the balance of the year, we arrive at a decline of -26.7% Q/Q. If we add to that less-than-seasonal growth for the balance of the year—not shortfalls, but half of normal growth (i.e. a 4% Q/Q increase rather than an 8% Q/Q increase)—we arrive at a decline of -28.8%. Assuming a 25% Q1 decline—still less than what we know from NSM and SMSC for the similar period—we arrive at -34.0% Y/Y. As each of these are well within the realm of possibility given existing data, we view our initial -23.0% Y/Y number as a best-case scenario.

ACTION: CONTINUE TO AVOID SEMI SUPPLY CHAIN. In the table below, we list semis ranked by the delta between current Street 2009 Y/Y rev growth and our best-case scenario: