Archive: November, 2006

Don’t Hold Your Breath Waiting for More Semiconductor Buyouts

Ever since the Freescale buyout, firms have been coming out left and right with their lists of the next buyout candidates. Prudential is the latest to join the fray, reports Tech Trader Daily:

“[S]emiconductor comapnies and their balance sheets are being managed too conservatively relative to the lower risks they now face,” he writes. “[I]f semiconductor boards don’t rationalize balance sheets to reflect their lower risk profiles, then LBO firms may step in and do it for them.”Lipacis lists five stocks with “the most opportunity for upside through more efficient use of their balance sheets:

* Analog Devices (ADI)
* Linear Technology (LLTC)
* Altera (ALTR)
* Texas Instruments (TXN - Annual Report)
* Maxim Integrated Products (MXIM)

He thinks those companies could substantially raise their valuations via a combination of share repurcases and the issuance of debt; he says potential upside to the shares could be as high as 20%-40%.

We agree that the semicondustor industry could use some financial discipline. However, when the excitement first started cranking up, we said if you figure the average buyout will be at 9x EBITDA and you expect a 25% buyout premium to make speculating worth your while, you should only buy stocks trading below 7.2x EBITDA. Let’s see how Prudential’s list compares:

ADI – 10.6x

LLTC – 11.2x

ALTR – 15.9x

TXN – 7.7x

MXIM – 9.3x

Granted, all of these represent trailing EBITDA figures, and a buyout would likely be based on a forward multiple. However, the essentially done deal of Freescale still trades at just 8.6x trailing EBITDA, lower than all of the stocks Prudential is touting with the exception of Texas Instruments. Furthermore, since we think semiconductor EBITDA will likely decline next year, basing the target on a trailing multiple is probably generous.

Disclosure: William Trent has a long position in SMH.

Topics: Altera (ALTR), Analog Devices (ADI), Linear Technology (LLTC), Maxim Integrated Products (MXIM), Semiconductor HOLDRS (SMH), Semiconductors, Stock Market, Texas Instruments (TXN) | 1 Comment

Carnival of Investing Call for Submissions

We will be hosting the Carnival of Investing next Monday, and have yet to receive a single submission. Give us some work to do over the weekend by submitting your favorite investing post using the submission form here.

Topics: Stock Market | No Comments

Xerox Catches Debt Upgrade

We have been skeptical of the turnaround at Xerox (XRX). Although the company frequently points to the strong growth in their color and digital product lines, it never seems to be enough for overall sales growth to keep pace with economic growth, because declining older businesses take it all away. What’s more, the suggestion that shareholders treat restructuring charges as one-time events stretches credulity when the company records them every year.

However, as we noted before, debt reduction has positioned the company to reduce its borrowing costs.

Moody’s raises Xerox debt rtgs to investment-grade | Reuters.com

Moody’s raised Xerox’s senior unsecured rating one notch to “Baa3,” the lowest investment-grade rating, from “Ba1.” A rating change to investment grade can significantly reduce a company’s borrowing costs.The outlook on the rating is positive indicating it could be raised again over the next 12 to 18 months.

So good news for bondholders. For stockholders, however, we are still concerned about the declining cash flow.

Topics: Stock Market, Xerox (XRX) | No Comments

LCD Panel Makers Find Capacity is Capacity

We have closely followed the overcapacity situation in LCD panels, and have maintained that the way to solve the problem is to produce only as many panels as are needed. The quest for market share has more frequently made the problem worse. Some argue that the new plants are to produce larger monitors, but we have said that it can also be used to produce larger quantities of the smaller monitors. As DigiTimes reports:

Since LPL’s 5G plant is running at full capacity and sales for 42- and 47-inch TV panels are below expectations, the company decided to volume produce 19-inch monitor panels at its 7.5G plant, the sources added. The company is also set to volume produce 19-inch widescreen LCD monitor panels at its 7.5G plant in January 2007, said the sources.

The move is surprising, as it is not efficient to produce 17-inch and 19-inch LCD monitor panels in such advanced facilities; next-generation plants are more suited for TV panel production, the sources pointed out.

The sources added that the move will accelerate price drops for LCD monitor panels.

The panel makers seem to get it at times, though the record is spotty. LCD panel makers to cut capacity 10% in December:

LCD panel makers such as AU Optronics (AUO), Chunghwa Picture Tubes (CPT) will slow their production by 10% in December, according to sources. Chi Mei Optoelectronics (CMO) will not decrease output of its LCD monitor panels but will reduce its LCD TV panel output, the sources added.

It’s a start. However, it likely has as much to do with an anticipated seasonal slowdown after the holidays than with any real discipline on the part of manufacturers.

Topics: AU Optronics (AUO), Corning (GLW), LG Philips LCD (LPL), Matsushita (MC), Sharp (SHCAY.PK), Sony (SNE), Stock Market | No Comments

Texas Instruments CEO Sees No Evil Inventory

Our readers are quite familiar with our concern that excessive capacity additions are going to make an already bad inventory situation even worse. Texas Instruments CEO Rich Templeton begs to differ – MarketWatch:

The semiconductor industry doesn’t appear to have a serious problem with excess inventory, Texas Instruments Inc. (TXN - Annual Report) Chief Executive Rich Templeton said Tuesday. “I don’t think we have an inventory situation that’s out of control compared to what we’ve seen in the past,” Templeton said at a Credit Suisse conference for investors.

He said many customers are comfortable with trimmer inventories, meaning they reorder more slowly knowing they can get additional chips from suppliers if needed.

What Templeton is saying is that semi manufacturers need to carry more inventory because their customers don’t want to. While that is fair enough, it doesn’t mean the companies should pile up their own inventory forever. The reason customers don’t want to hold semiconductors in inventory is that they generally decline in value over time. That doesn’t change just because it is the manufacturer holding it rather than the customer, but simply reflects a shift in the risk profile of supplier and customer.

Texas Instruments has said as much themselves, as the article notes:

In its third-quarter financial report issued in October, TI said declining orders led it to expect slower fourth-quarter growth than normal. Customers had broadly replenished their inventories and were operating with a lower backlog of products, the company said. Buyers believed chip supplies had improved. The company also said an inventory correction continued in Japan, where manufacturers were building more low-priced cell phones.

So there you have it. There is no glut, unless you count Japan, the customers that have inventory but no backlog, and the inventory on manufacturer’s balance sheets (that amounts to the “improved supplies.”)

Disclosure: William Trent has a long position in SMH.

Topics: Semiconductor HOLDRS (SMH), Semiconductors, Stock Market, Texas Instruments (TXN) | 1 Comment

GDP Weaker than Headline Suggests

The Bureau of Economic Analysis released the revised 3rd quarter GDP report, which the market has received with enthusiasm. Economy stronger than first thought in third quarter – Yahoo! News:

The U.S. economy grew faster than first thought in third quarter on strong business investment, even as the housing sector posted its biggest decline in more than 15 years, the government said Wednesday.
After-tax corporate profits during the quarter were far stronger than expected, and will likely reinforce expectations that Federal Reserve policy-makers would keep interest rates unchanged for the next few months.

While it is true that profits were up sharply (31.5% from the year-ago quarter) cash flow growth was in line with recent trends. To us this suggests that the profits reading was probably anomalous.

profitscashflow.jpg

The article, however, gushes past this:

Even so, business spending was stronger than first thought according to the Commerce Department report, which was the second estimate of the third quarter figures after an initial report issued last month.

Business spending rose at a 10 percent annual rate, up from the 8.6 percent rise first estimated. Corporate profits during the quarter, after taxes, advanced by 4.6 percent. That was far above the scant 0.3 percent advance in the second quarter and surprisingly higher than the 0.4 percent gain economists in a Reuters poll were expecting.

Really? Here’s our chart of the year/year change in business investment on equipment and software:

equipmentsoftware.jpg

To us it still looks like a significant slowdown. So where is the discrepancy? According to the article:

Business spending on inventories increased at a $58 billion rate, sharply higher than the $50.7 billion earlier estimated.

Higher inventories won’t do any good unless consumers buy them. If they stay on the shelves, today’s surprise gain will simply equate to tomorrow’s surprise shortfall.

Topics: Capital Goods, Economy, Stock Market, Technology | 1 Comment

Offshorers to Offshore?

We have noted several times how impressed we are with the rapid hiring pace at Indian IT services firms such as Infosys (INFY), Cognizant (CTSH) and Wipro (WIT). In fact, we viewed the need to constantly hire more people one of the only obstacles in the path of their rapid growth.

Still, as cost effective as labor based in India may be, the firms need feet on the ground in its customer’s local countries to take the orders and coordinate efforts. So perhaps it is not surprising that the offshore firms are now preparing a large onshore hiring thrust. The Telegraph – Calcutta : Business:

Wipro plans to have more foreign employees as it expands its business in Europe and South America.The company expects foreign employees to make up 25 per cent of its total workforce in future against 5 per cent at present.

Wipro chief Azim Premji today said as part of its policy to go global, the company would have to employ more local nationals in the countries to which it was spreading its wings.

Let’s hope they get started soon. The employment numbers could use their kind of hiring spree.

Topics: Cognizant Technology Solutions (CTSH), Infosys (INFY), Stock Market, Wipro Ltd. (WIT) | 1 Comment

Leading Apps Vendors Compete for Telecom Customers

IBM to buy Vallent for telecom expertise | InfoWorld | News | 2006-11-28 | By China Martens, IDG News Service

IBM is looking to better meet the needs of wireless service providers with its planned purchase of network performance monitoring and service management software vendor Vallent.
IBM announced Tuesday its intention to purchase privately held Vallent for an undisclosed sum. The vendor hopes to close the deal, subject to regulatory approval, in the first quarter of calendar 2007. At that point, IBM will fold Vallent into its Tivoli Software systems management business unit.IBM plans to add Vallent’s software to the Netcool products it gained through the $865 million acquisition of network management software vendor Micromuse, which closed in February.

Database rival Oracle (ORCL - Annual Report) has also been bulking up to serve telecom customers. Provided IBM and Oracle can integrate the businesses properly, we think consolidation is good for the software industry and its customers.

Topics: IBM, Oracle (ORCL), Stock Market | No Comments

Merrill Thinking What We’re Thinking on Semi Buyouts

Back when Morgan Stanley got excited about the Freescale buyout, we threw some cold water on the idea, saying “If you figure the average buyout will be at 9x EBITDA and you expect a 25% buyout premium to make speculating worth your while, you should only buy stocks trading below 7.2x EBITDA. Even then you should only buy the ones that might make the takeout boys salivate.”
It seems that line of thought is catching on. Tech Trader Daily » Buyout Of Chip Fab UMC? No Way, Says Merrill Lynch

Shares of United Microelectronics (UMC), the Taiwanese contract chip maker better known as UMC, have appreciated recently on speculation that the company could be a potential buyout target. But Merrill Lynch’s Daniel Heyler this morning warns that those hopes are likely to fade – and that the stock is likely to retreat.

Heyler says the company does not look very appealing as a buyout candidate, anyway. “Applying our takeover screen, UMC ranks 19 out of 27 Asian-based companies,” he says. “UMC scores low in terms of net cash to market cap and FCF (free cash flow) margin. At 7.1x EV/EBITDA, valuation is higher than all of the top-ten ranked companies.”

Of course, with the money flying around in private equity-land these days, who knows? It sure wouldn’t hurt the industry to catch a little bit of private-market discipline.

Topics: Freescale (FSL), Semiconductor HOLDRS (SMH), Semiconductors, Stock Market, United Microelectronics (UMC) | 1 Comment

Semi Cycle Ain’t What it Used to Be

WSTS projects semiconductor industry growth to peak in 2008

World Semiconductor Trade Statistics (WSTS) projects the global semiconductor industry will continue to grow in 2007 and peak in 2008, said WSTS Asia-Pacific president Tony Huang.Huang said the global semiconductor industry should enjoy mild growth in 2007 at 8.6%, up further from this year’s projected 8.5%. Memory IC production value growth should grow at 8.9% while logic IC will reach 8.8% in 2007. The entire industry growth should peak in 2008 with an on-year growth rate of 12% to a production value of US$314.4 billion.

That’s it? What happened to the 40% year/year growth rates seen as recently as 2004?
semidemand1.jpg

And more importantly, when are they going to fill all of the excess capacity they are adding?

semisupply.jpg

Disclosure: William Trent has a long position in SMH.

Topics: Advanced Micro Devices (AMD), Applied Materials (AMAT), Intel (INTC), KLA-Tencor (KLAC), MEMC Electronic Materials (WFR), STMicroelectronics (STM), Semiconductor HOLDRS (SMH), Semiconductors, Stock Market, Texas Instruments (TXN) | 1 Comment