We'll Wait Awhile Before Buying Semi and LCD Stocks

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 |  Includes: ADI, ALTR, AMD, AUO, AVGO, GLW, INTC, LPL, NVDA, QCOM
by: William Trent, CFA

We have written about rising inventories of semiconductors and LCD panels for some time. Now that the market has taken notice, driving down the shares of related companies like Corning (NYSE:GLW) and the entire SOX index, company management is beginning the next stage of a play we’ve seen before: denial.

As yesterday's Digitimes reports:

Although leading TFT LCD panel makers including AU Optronics (NYSE:AUO) and LG Philips LCD (NYSE:LPL) have trimmed their shipment outlook for the second quarter, LCD driver IC design house Novatek Microelectronics stressed that its inventory is at reasonable levels and the company’s margins should remain flat on quarter, the company stated at a June 12 investors conference.

Novatek indicated that present inventory levels are at 40-50 days, which is a reasonable level for the company. Although admitting the inventory value is higher than the first quarter’s NT$3 billion, Novatek anticipates that once panel demand resumes, inventory concerns will ease immediately.

You don’t say - stronger demand will reduce inventory? We guess so - as long as you don’t make more in the meantime.

Or how about this one from today's Digitimes:

While noises circulate about the high levels of inventory that the semiconductor industry is encountering, actual inventory is still being managed at reasonable levels, according to executives from both the Taiwan-based Industrial Economics and Knowledge Center [IEK] and World Semiconductor Trade Statistics [WSTS], headquartered in San Jose.

In Taiwan, semiconductor production value should continue to pick up in the second quarter, with average growth of 9.1%, and outstrip growth of 2.4% in global production value in the second quarter, said IEK analyst Jerry Peng.

Although he admitted seeing a rise in inventory levels at leading chipmakers, including Altera (NASDAQ:ALTR), Advanced Micro Devices (NASDAQ:AMD), Analog Devices (NASDAQ:ADI), Intel (NASDAQ:INTC), Broadcom (BRCM), Nvidia (NASDAQ:NVDA) and Qualcomm (NASDAQ:QCOM) in the first quarter, Peng said the overall inventory index was still being maintained at a sub 1.1 level. He added that industry makers should only worry about the inventory level if the index exceeded 1.2.

Love that second paragraph. First of all, higher production will only exacerbate any inventory issues there may be. We think they are saying they will have growing market share of excess inventory. And the third paragraph: “Well, sure, inventory levels are up at the chipmakers that make up about 80 percent of the business, but the rest are fine.”

After denial comes anger. We think that means cancellation of semiconductor equipment orders. Then bargaining (price cuts.) Finally there is depression (of stock prices) followed by acceptance. We’ll be buyers at about stage four.