Semiconductors Weekly: Semis Flat on 6% Cuts - Moore Stress Beneficiaries Outperforming

Transcription

1 INDUSTRY NOTE USA Weekly: Semis Flat on 6% Cuts - Moore Stress Beneficiaries Outperforming Key Takeaway Data from 37 semiconductor earnings reports shows that at the median, semis lowered 4Q revenue expectations by 6%, but stock prices remained flat the day after reporting, and also since reporting. Stocks we identified as Moore Stress beneficiaries appreciated since reporting (,, ),, while stocks we think challenged by Moore Stress declined (, ). Semis Staying Flat on Cuts: Of the 37 semiconductor companies that have reported so far, 31 have lowered 4Q revenue expectations. At the median, 4Q revenue expectations have been cut by 6%, but semi stocks remained flat the day after reporting, as well as since reporting. We think this means bad news is baked in, but there is little optimism for an imminent turnaround. Moore Stress Evidence? There were several datapoints that we think are consistent with our Moore Stress thesis since we published it on Sep 26: 1) ASML announced its intention to acquire CYMI for a substantial premium, we think in an attempt to accelerate the development of EUV lithography tools, 2) on its earnings call, CEO posited that cost per transistor on 20nm would not likely decline, and 3) announced that it lost three high-volume sockets to ASICs. None is proof of our Moore Stress thesis, but all three are consistent with our view that cost per transistor is inflecting on leading edge nodes, and is impacting the industry today. EQUITY RESEARCH AMERICAS Moore Stress Beneficiaries Outperforming: Stocks we identified as Moore Stress beneficiaries appreciated since reporting 3Q12 results -,, and appreciated by 5%, 4%, 15% and 8%. Conversely, stocks we identified as being challenged by Moore Stress declined - and have declined by 3% and 7%. We remain buyers of Moore Stress beneficiaries,,,, and. Moore Stress Related Notes: /24/2012: Takeaways from "Moore Stress" Conf Call w/ Dr. Handel Jones /11/2012: Moore Feedback - EUV Push? 9/26/2012: Moore Stress = Structural Industry Shift Mark Lipacis * Equity Analyst (415) mlipacis@jefferies.com Sundeep Bajikar * Equity Analyst (415) sbajikar@jefferies.com Jonnathan Lee * Equity Associate (415) jlee@jefferies.com * Jefferies & Company, Inc. Jefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see analyst certifications, important disclosure information, and information regarding the status of non-us analysts on pages 11 to of this report.

2 Semis Flat On Cuts Chart 1 shows a list of 37 semiconductor companies that have reported 3Q earnings, as well as how much they lowered 4Q revenue expectations, and how the stocks performed one day after reporting, and since reporting as of last Friday. At the median, semiconductor stocks lowered 4Q revenue expectations by 600 bps, and stayed flat the day after reporting, and also flat as of last Friday (/26/2012). Chart 1 shows 37 semiconductor companies that have reported 3Q results. At the median, semis lowered 4Q revenue expectations by 600 bps, and then saw their stocks flat the day after reporting. We believe this indicates that semiconductor stocks are already discounting worse fundamentals than are being reported. Chart 1: Revision of 4Q Guidance and Stock Performance Stock Earnings Date 4Q Rev Guidance vs. Consensus Stock Performance On Day After Stock Performance Since Reporting RFMD /23/ SLAB /24/12 4% - - TQNT /24/12-13% -13% AMCC /25/12 25% 26% EXAR /24/12 8% 9% /18/12 3% - HITT /25/12 - CREE /17/12-3% /16/ % - ENTR /24/ /25/12-5% 5% POWI /25/12-6% 5% STM /23/12-3% 4% FSL /25/12-3% 3% /18/12-4% 5% 8% /23/12-4% -3% -5% CY /18/12-6% -4% - MLNX /17/12-6% -2-25% /25/12-6% 15% 15% /17/12-6% - -3% AMKR /25/12-6% - - MCRL /25/12-8% /23/12-8% -8% -7% /22/12-8% 4% LRCX /17/12-8% 7% 5% /16/12-8% - -3% CODE /25/12 -% ISIL /24/12 -% 8% 8% INVN /23/12 -% -7% -1 FCS /18/ % -4% GSIT /25/ % -5% /18/ % -2 ASML /17/12-13% 8% VLTR /22/12 -% MKSI /24/12-15% -3% - KLAC /25/12-16% - TER /24/12-28% 8% 6% Median -6% Source: Jefferies, CapIQ page 2 of

3 NDX/SOX Ratio SOX/SPX (Relative Performance) Oct-99 Oct-01 Oct-00 Oct-02 Oct-01 Oct-03 Oct-02 Oct-04 Oct-03 Oct-05 Oct-04 Oct-05 Oct-06 Oct-06 Oct-07 Oct-07 Oct-08 Oct-08 Oct-09 Oct-09 Oct- Oct- Oct-11 Oct-11 Oct-12 Oct-12 SOX Index Semis NTM Earnings Forecast Ex- ($,bn) The SOX underperformed the SPX by 2bps over the past week, and underperformed by 340 bps over the past four weeks. Semis outperforming once estimate cuts start is consistent with historical stock behavior. Semiconductor stocks typically underperform 3-4 months in front of estimate cuts, and outperform shortly after consensus starts cutting estimates. Semis have underperformed materially over the past 4 months, we think in anticipation of the cuts that are happening now. Chart 5: Semis NTM Earnings Forecast vs. Relative Performance SOX/SPX Consensus NTM Earnings Forecast Vertical lines represent start of earnings cuts Semis started to underperform at the end of Jan '12, anticipating cuts that started in May '12. Cuts started May ' Source: Jefferies and Capital IQ SOX is above historical level of maximum negativity Chart 6: SOX vs. NDX/SOX 12 SOX bottomed at 370 on 04/30/99 and ran 26 trough-to-peak SOX SOX bottomed at on 08/31/ and ran 54% trough-to-peak SOX bottomed at 171 on 11/20/08 and ran 134% trough-to-peak Historical Maximum Negativity for SOX relative to NDX is NDX/SOX -800 Source: Jefferies and Capital IQ page 3 of

4 SOX/SPX Values Indexed on 12/8/08 SOX/SPX Values Indexed on 09/08/04 25-Feb Aug Feb Apr Mar Sep Mar May Apr Oct Apr Jun May Nov May Jul Jun Dec Jun Aug Jul Jan Jul Sep Aug Feb Oct Aug Mar Sep Nov Sep Oct Apr Dec Oct May Nov Jan Nov Dec Jun Dec Feb-05 SOX/SPX Values Indexed on 7/17/12 SOX/SPX Values Indexed on 7/17/12 SOX/SPX Values Indexed on 09// SOX/SPX Values Indexed on 07/21/06 26-Feb Apr- 27-Feb-12 1-Feb Mar-12 1-Mar May- 27-Mar-12 1-Apr Apr Apr Jun- 1-May May May Jul- 1-Jun Jun Jun Aug- 1-Jul Jul Jul Sep- 1-Aug Aug Oct- 26-Aug-12 1-Sep Sep Nov- 26-Sep-12 1-Oct Oct Dec- 26-Oct-12 1-Nov Nov Jan Nov Dec-12 1-Dec Dec Feb-11 SOX/SPX Values Indexed on 7/17/12 SOX/SPX Values Indexed on 07/17/12 Chart 7: Relative SOX/SPX Values in 2004 and 2012 Chart 9: Relative SOX/SPX Values in 2006 and SOX bottomed at 352 on 09/08/04 and ran 57% trough-to-peak (4/04-2/05) SOX bottomed at 385 on 07/21/06 and ran 4 trough-to-peak (2/06-12/07) 1.3 (2/12 - /12) (2/12 - /12) Chart 8: Relative SOX/SPX Values in 2008 and 2012 Source: Capital IQ, Jefferies Chart : Relative SOX/SPX Values in 20 and SOX bottomed at 171 on 11/20/08 and ran 134% trough-to-peak SOX bottomed at on 08/31/ and ran 54% trough-to-peak 1.3 (2/12 - /12) (8/08-6/09) (2/12 - /12) (4/ - 2/11) page 4 of

5 EV/S vs. Avg EV/S at Cycle Troughs 45% % 33% 3 28% 26% 3% -4% -4% -5% -% % -3-58% -64% -75% EV/S, Current 2008 Trough 187% % 115% 8% 85% 76% 58% 36% 35% 2 13% - -7% -% -17% -53% Semis Discounting a Worse than Average Trough But Not an 08-Style Financial Crisis In the Chart directly below, we compare the EV/S today to the average EV/S during cycle troughs over the past half dozen years ( 06, 08, ). A stock with a negative reading indicates that the EV/S today is lower than the average of those previous cycles. Our interpretation of Chart below is that 5 of our coverage universe is discounting something worse that the average trough over the past decade. In the Chart directly below, we compare the EV/S today to the EV/S when semis troughed during the 2008 financial crisis. Here, only,,,, and are close to those valuation levels. Our take on these slides is that semis are discounting something worse than the average trough, but not as bad as the 2008 financial crisis. Chart 11: EV/Sales (trailing) Current vs. Avg at Past Decade Troughs 5 5 near or below the average EV/S at cycle troughs over the past half-dozen years('06, '08 and '). Chart 12: EV/Sales (trailing) Current vs. 08 Financial Crisis Trough near or below EV/S at the financial crisis('08) trough including,,, and Source: Capital IQ, Jefferies page 5 of

6 Chart 13: EV/S (trailing): Current and vs. Cycle Troughs over 06, 08 and Co P/E TTM P/E NTM P/TB Current EV/S Source: Jefferies, company data, CAPIQ EV/S at Stock Trough Avg Trough EV/S ('06, '08, % Diff Current vs Min % Diff Current EV/S vs. '08 Trough EV/S % Diff Current EV/S vs. Avg Trough EV/S ('06, '08, ') % 127% 45% % 58% % -53% -58% % 8% -5% % 85% 28% NA % -% % % -64% % 35% 3% % 187% -4% % 13% % -17% -75% % -7% -24% % % 115% -% % 36% % 5% % % 76% 34% Median % -4% Average % -% Min EV/S page 6 of

7 WTD Stock Performance YTD Stock Performance 8% ^sox ^spx 56% ^spx ^sox 6% 17% 13% 13% 9% 8% 7% 5% 5% 5% 3% 3% - -9% -1-13% -13% -13% -% -18% -2-27% -35% -36% -44% % -5% -5% -5% -6% Stock Performance QTD Stock Performance 16% ^spx ^sox 7 ^spx ^sox 9% 7% 4% 4% 3% 19% 18% % 13% 13% 5% 4% - -4% -5% -6% -6% -8% -8% -% -13% -13% -% -17% % -9% % -15% % -27% -3-35% -38% -38% -43% -3-33% -58% -6-75% -64% Chart : WTD Stock Performance % Chart 15: QTD Stock Performance 3 8% 2 6% % 4% - -4% -6% -8% -% Chart 16: YTD Stock Performance 8 Chart 17: Stock Performance page 7 of

8 P/Tangible BV P/E TTM EV/Sales TTM P/E NTM Chart 18: P/E TTM Chart 19: P/E NTM Chart 20: P/Tangible BV 12 Source: Capital IQ, Jefferies Chart 21: EV/Sales TTM page 8 of

9 EV/FCF FCF Yield (%) 13% 1 % 9% 9% 9% 36 8% 34 8% 16 8% 16 7% 16 7% 6% 6% 6% 12 6% 12 5% 12 4% Net Cash Per Share ($) Dividend Yield (%) 4.4% % % 2.4% 1.8% 1.3% 1.3% Chart 22: EV/FCF (2012) 40 Chart 23: Dividend Yield (%) 5% % % Chart 24: 2012 FCF Yield (%) 15% % Source: Capital IQ Jefferies Chart 25: Net Cash/Share $ $5 $0 $9.5 $7.9 $6.4 $5.2 $5.2 $4.4 $3.9 $3.8 $3.7 $2.9 $2.2 $2.1 $2.1 $1.6 $1.6 $0.8 $0.6 $0.6 $0.5 -$0.7-$0.7 -$-$1.8 5% -$5 -$ -$11.4 -$15 Source: Capital IQ Jefferies Source: Capital IQ Jefferies page 9 of

10 Chart 26: Semi Valuation Table Ticker Price Market JEF EPS Street EPS JEF Revenues Street Revenues P/E EV/S FCF Yield EV/FCF Rating PT 26-Oct-12 Cap 2012E 2013E 2012E 2013E 2012E 2013E 2012E 2013E 2012E 2013E 2012E 2013E 2012 Large Cap* $11,921 Hold $44.0 $4 $2.59 $2.22 $2.59 $2,1 $2,887 $2,751 $2, % 7% $9,836 Hold $36.0 $1.74 $1.82 $1.74 $1.92 $1,799 $1,969 $1,799 $2, % 16% $1,542 Buy $5.0 -$0.04 -$0.02 -$0.21 -$0.24 $5,409 $4,813 $5,422 $4, % $8,458 Buy $43.0 $2.79 $3.08 $2.82 $3.12 $1,665 $1,572 $2,408 $2, % 9% $18,389 Buy $40.0 $2.89 $2.93 $2.88 $2.96 $7,992 $8,861 $7,975 $8, % $113,8 Hold $24.0 $2.20 $2.17 $2.21 $2. $53,464 $54,647 $53,443 $54, % 9% $7,453 Hold $35.0 $1.79 $1.93 $1.75 $1.85 $1,288 $1,357 $1,288 $1, % 7% $6,463 Buy $38.0 $1.89 $2.27 $1.91 $2.17 $1,519 $1,809 $1,528 $1, % 8% 7.76 $4,423 Hold $9.0 $0.87 $2 $0.86 $0.88 $3,178 $3,356 $3,6 $3, % $581 Buy $2 $0. $0.18 $0.96 $6 $302 $322 $304 $ % 8% $8,297 Buy $33.0 $1.66 $1.99 $1.68 $1.92 $2,409 $2,593 $2,421 $2, % 8% $7,509 Hold $16.0 $5 $8 $3 $8 $4,415 $4,594 $4,368 $4, % % $6,079 Buy $28.0 $1.62 $2.44 $1.71 $2.58 $4,334 $4,602 $4,336 $4, % 13% $2,8 Buy $9.0 $0.57 $0.87 $0.55 $0.76 $2,979 $3,186 $2,979 $3, % 15% $32,998 Buy $33.0 $1.84 $2.05 $1.64 $1.74 $12,796 $13,3 $12,780 $12, % 8% $8,873 Hold $36.0 $1.79 $1.96 $1.79 $1.96 $2,213 $2,266 $2,213 $2, % 7% 12 Small-Mid Cap & Memory ** 3.97 $73 Buy $8.0 $0.32 $0.42 $0.45 $0.63 $4 $168 $3 $ $1,485 Buy $37.0 $0.34 $0 $0.35 $0.99 $233 $3 $234 $ $926 Hold $33.0 $0.77 $0.86 $0.78 $7 $51 $61 $51 $ $249 Buy $16.0 $0.24 $0.59 $0.23 $0.53 $96 $131 $96 $ % $443 Buy $5.0 -$0.01 $0.30 -$0.04 $0.24 $284 $308 $284 $ % 7% 5.47 $5,542 Buy $.0 -$1 $0.11 -$0.24 $0.55 $8,056 $9,4 $8,212 $9, % $1,098 Hold $6.5 $0.37 $0.50 $0.35 $0.48 $553 $602 $547 $ $,313 Buy $5 $2.02 $3.38 $2.02 $3.40 $5,011 $6,290 $5,042 $5, % Median % 8% 12 Average % 8% Total $122,331 $129,223 $123,770 $129,606 * Mark Lipacis ** Sundeep Bajikar Source: Jefferies, company data, Capital IQ page of

11 Analyst Certification I, Mark Lipacis, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Sundeep Bajikar, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Jonnathan Lee, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). 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The aim of the conviction list is to publicise the best individual stock ideas from Jefferies Global Research 2. Only stocks with a Buy rating are allowed to be included in the recommended list. 3. Stocks are screened for minimum market capitalisation and adequate daily turnover. Furthermore, a valuation, correlation and style screen is used to ensure a well-diversified portfolio. 4. Stocks are sorted to a maximum of 30 stocks with the maximum country exposure at around 5. Limits are also imposed on a sector basis. 5. Once a month, analysts are invited to recommend their best ideas. Analysts stock selection can be based on one or more of the following: non-consensus investment view, difference in earnings relative to Consensus, valuation methodology, target upside/downside % relative to the current stock price. These are then assessed against existing holdings to ensure consistency. 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12 Risk which may impede the achievement of our Price Target This report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, the financial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance of the financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, and income from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financial and political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates may adversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities such as ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk. Other Companies Mentioned in This Report Advanced Micro Devices, Inc. (: $2.07, BUY) Altera Corp (: $30.40, HOLD) Audika ( FP: 9.25, BUY) Avago Technologies (: $33.83, BUY) BCD Semiconductor Manufacturing Ltd. (: $3.98, BUY) Broadcom Corporation (: $31.76, BUY) Cavium Inc. (: $29.90, BUY) EZchip Semiconductor Ltd. (: $32.12, HOLD) Inphi Corporation (: $8.78, BUY) Intel Corporation (: $21.95, HOLD) Lattice Semiconductor Corporation (: $3.79, BUY) Linear (: $31.58, HOLD) M/A-COM Solutions Holdings, Inc. (: $12.30, BUY) Marvell Group Ltd. (: $7.76, HOLD) Maxim Integrated Products, Inc. (: $27.77, BUY) Microchip Inc. (: $31.73, BUY) Micron, Inc. (: $5.47, BUY) NVIDIA Corporation (: $12.05, HOLD) NXP NV (: $24.02, BUY) ON Semiconductor Corporation (: $6.15, BUY) PMC-Sierra, Inc. (: $4.89, HOLD) SanDisk Corporation (: $42.23, BUY) Texas Instruments Incorporated (: $28.92, BUY) Xilinx Corp (: $32.83, HOLD) Distribution of Ratings IB Serv./Past 12 Mos. Rating Count Percent Count Percent BUY % % HOLD % % UNDERPERFORM % Other Important Disclosures Jefferies Equity Research refers to research reports produced by analysts employed by one of the following Jefferies Group, Inc. ( Jefferies ) group companies: United States: Jefferies & Company, Inc., which is an SEC registered firm and a member of FINRA. United Kingdom: Jefferies International Limited, which is authorized and regulated by the Financial Services Authority; registered in England and Wales No ; registered office: Vintners Place, 68 Upper Thames Street, London EC4V 3BJ; telephone +44 (0) ; facsimile +44 (0) Hong Kong: Jefferies Hong Kong Limited, which is licensed by the Securities and Futures Commission of Hong Kong with CE number ATS546; located at Suite 2201, 22nd Floor, Cheung Kong Center, 2 Queen s Road Central, Hong Kong. Singapore: Jefferies Singapore Limited, which is licensed by the Monetary Authority of Singapore; located at 80 Raffles Place #15-20, UOB Plaza 2, Singapore , telephone: Japan: Jefferies (Japan) Limited, Tokyo Branch, which is a securities company registered by the Financial Services Agency of Japan and is a member of the Japan Securities Dealers Association; located at Hibiya Marine Bldg, 3F, Yuraku-cho, Chiyoda-ku, Tokyo ; telephone ; facsimile page 12 of

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