Semiconductor profits and share prices to improve significantly over next 12 months despite overall maturing of tech sector, say S&P Equity Analysts
Jan 21, 2004
Shares of companies in the semiconductor group overall have the potential to appreciate between 20-25% over the next 12 months, Standard & Poor's Equity Research Services stated in a report on the semiconductor industry released today. The authors of the report, Massimo Santicchia, Thomas Smith, CFA, and Richard Tortoriello, equity analysts at Standard & Poor's, a leading provider of independent investment research, ratings and indices, base that forecast on an analysis of price-to-book and price-to-sales ratios, and on the expectation that semiconductor firm profitability is going to continue to improve significantly, driven by multiple factors.Key factors driving semiconductor growth, according to the analysts, include surging demand from Asia, as outsourced manufacturing spurs prosperity in that region; improving corporate profits in the U.S., which are leading to increased IT investment; under-investment in semiconductor manufacturing capacity, which has led to high capacity utilization rates and, ultimately, pricing power; and high operating leverage at chipmakers, resulting from three years of cost reductions.Standard & Poor's currently maintains a positive outlook for the semiconductor industry and an overweight recommendation for the technology sector. Santicchia, Smith, and Tortoriello point out that while the semiconductor industry has shown steadily expanding gross margins over the past 18 years, the technology sector in general appears to be maturing, with a steady trend toward declining gross margins in many tech segments. Chipmakers do face a number of challenges, however, including rapidly rising semiconductor design costs; the rise of consumer electronics, whose chips carry lower margins; and extremely high price tags (two to four billion dollars) for new manufacturing facilities.Standard & Poor's Equity Research Services believes that the following segments of the chip industry hold a competitive advantage in the current environment: analog chipmakers, logic, foundries, and large integrated device manufacturers (IDMs).Semiconductor stocks currently ranked "Buy" (***** out of *****) by Standard & Poor's Semiconductor Equity Analyst Thomas Smith include Intel Corp. (NASDAQ: INTC - News), at $33 per share, Microchip Technology (NASDAQ: MCHP - News) at $33 per share, and Texas Instruments (NYSE: TXN - News), at $34 per share.