Semiconductor Industry Stocks Still Have a Tremendous Upside but Only For Selected Names, According To Industry Expert

• On 4:26 pm EDT, Tuesday September 1, 2009

67 WALL STREET, New York - September 1, 2009 - The Wall Street Transcript has just published its Semiconductors, Semiconductor Equipment, and Software Report offering a timely review of the sector to serious investors and industry executives. This 115 page feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: DRAM Industry Reorganization -- Semiconductor Supply Chain Status -- Netbook Growth -- LCD TV Growth -- NAND Pricing and Demand -- Micro-Electro-Mechanical Systems (MEMS) Demand Cycle -- Ultra Low Voltage Processors -- Semiconductor Inventory Aging and Type -- Processor Power Developments

Companies include: Intel (INTC); Micron Technology (MU); Microsemi (MSCC); STEC, Inc. (STEC); National Semiconductor (NSM); Texas Instruments (TXN); Taiwan Semiconductor Manufacturing (TSM); ON Semiconductor (ONNN); Intersil (ISIL); Linear Technology Corporation (LLTC); Monolithic Power Systems (MPWR);Advanced Photonix (API); Waytronx Inc. (WYNX); LTX-Credence (LTXC); Mattson Technology Inc. (MTSN); Oclaro, Inc. (OCLR); Silicon Laboratories (SLAB); Microchip Technology, Inc. (MCHP); Cohu, Inc. (COHU); FSI International, Inc. (FSII); Jaco Electronics (JACO); Cadence Design Systems (CDNS); Synopsys (SNPS); Mentor Graphics (MENT); Magma Design Automation (LAVA)

In the following brief excerpt from the 115 page report, Craig Berger, Senior Vice President - Equity Research FBR Capital Markets Corp., discusses the outlook for the sector and for investors.

TWST: Would you bring us up to date on recent trends and developments in the semiconductor industry this year?

Mr. Berger: Let me give you a little context. If you go back about a year ago to last summer - that was the old, pre-recession world, right? And demand was up at a higher level. Obviously, the US was teetering, but we hadn't yet fallen into this global recession. Then in September, Bear Stearns and Lehman collapsed, and we had a global credit crisis. Credit is really the lifeblood of any economy. So when the credit crisis happened and the recession set in, the stock market took a big dive and demand deteriorated. So we did have a step down in global consumption among both consumers and enterprises. But when credit contracts and becomes unavailable, beyond the typical recessionary drop in demand, everything else stops, too. And that's what we saw last Q4 2009. We saw companies like HP (HPQ), Dell (DELL), Samsung and Nokia (NOK) take their chip and finished goods inventories down as low as possible. So on top of the deterioration in demand, there has been a massive worldwide inventory drain. That happened in the fourth and first quarter. In the fourth quarter, in fact, more chip orders were cancelled than were placed. We actually had a quarter of net negative orders for the entire semiconductor industry, which has never before happened. Think about that. The $250-billion-a-year industry had net negative orders in the fourth quarter because everybody said, "I don't know if I need this product; I don't know what I'm going to build; I don't know what demand is." And as we moved into the first quarter, everybody shut down their factories and ordered employees to take a month or two months off work.

TWST: What is your outlook going forward?

Mr. Berger: I think global inventories throughout the electronic supply chain are so low that the chip guys are going to have a pretty good third quarter due to a number of trends. These include seasonal strength, better consumer demand for PCs, handsets, smart phones and LCD TVs, and a return to shipping at or above consumption in the automotive and industrial sectors. Chip customers may be forced to increase their buffer inventory levels. A lot of hardware OEMs and chip distributors are operating below desired inventory levels because in Q1, chip customers could get their chips on demand. Normally, it takes six to eight weeks to receive chips orders. But if customers are able to get chips shipped on demand, then they don't need to keep eight weeks of supply in inventory. So everybody took inventory levels down. Now the reverse is happening. We are seeing the need for inventory replenishment.

TWST: Most of the demand you are anticipating is consumer-driven?

Mr. Berger: Yes.

TWST: Are you anticipating a pickup on the enterprise side?

Mr. Berger: I don't expect any pickup in enterprise spending until 2010.

TWST: So the economic picture is looking better?

Mr. Berger: Absolutely.

TWST: So you are somewhat optimistic then for the next few quarters?

Mr. Berger: Yes, for the chip makers in particular. Because of the inventory drain up and down the electronics supply chain, inventories were taken far below the reduction in demand. It wasn't just chip inventory that was drained, but sub-system inventory and finished goods inventory at retailers. And so because of all of the inventory draining in Q4 2008 and Q1 2009, we're starting to see the reverse happen in Q3 2009 and Q4 2009. So that's going to bring some added benefits to chip suppliers beyond higher shipments related to the slight demand recovery we're seeing and the world's higher seasonal needs. So inventory replenishment is keeping me constructive. The semi index is still down almost 50% peak to trough, from 550 to under 300. This is significantly worse than the broad market. I do think there are some good values out there.

TWST: We'll be talking to ON Semiconductor's CEO, Keith Jackson, for this issue.

Mr. Berger: That's a really phenomenal management team. They've done a remarkable job turning the company around over the last five to six years. Another company I like is Silicon Labs (SLAB). It has a market cap of a couple of billion dollars. So it is a smaller cap. The stock has had a big run; so this isn't really near-term call. But over the longer term, Silicon Labs is still small enough to grow at very meaningful rate. It has multiple product cycles kicking, and it still trades at a reasonable valuation. It's one of the true growth stories out there. It's shipping at new peak revenues, meaning it has already surpassed Q3 2008 shipment levels. Very few semiconductor companies are doing this right now. A good way to tell which companies are really growing is to look at Q3 2009 versus Q3 2008.

TWST: Why are these companies so cash rich?

Mr. Berger: Because historically the semiconductor industry has been one of the more active capital market sectors. It's been a growth industry; it's the concrete of the technology world. So there's always been plenty of IPO money, debt money and available credit.

TWST: Thank you. (LKS)

CRAIG BERGER Senior Vice President - Equity Research FBR Capital Markets Corp. 299 Park Avenue 7th floor New York, NY 10171 (212) 457-3300 (212) 457-3378 - FAX www.fbrcapitalmarkets.com e-mail: fbrresearch@fbr.com

The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This 115 page special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online .

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