Needham & Company Semiconductor Capital Equipment Update: See Upside to 1H12 Consensus Estimates, but Downside Risks to 2H12

Needham & Company Semiconductor Capital Equipment Update Volume 24: Our 2012 Outlook: An Uneven, Mid-Cycle Recovery

We See Upside to 1H12 Consensus Estimates, but Downside Risks to 2H12

Analyst, Y.. Edwin, Mok, said, "We are bullish on semiconductor equipment stocks in the near term, but we believe 2012 will be a mixed year for the industry, characterized by a mid-cycle rebound in 1H12 followed by uneven growth in 2H12. Entering 2012, we see strong sequential revenue growth in 1Q12, driving upside to consensus estimates. We believe this recovery is supported by the bottoming of several semiconductor industry fundamental metrics, including reduced inventory levels, improved utilization rates and stable end demand during the holiday season. We believe the mid-cycle recovery should last into the summer, and we believe consensus estimates for 2012 are too conservative. While a typical mid-cycle rebound should last for several quarters, we see several risks that could lead to a pause or even a pullback in 2H12. We are concerned that the recovery is too concentrated at several leading capital spenders and at the foundry segment. Additionally, we expect the rebound to be dampened by the persisting weakness in PCs, lack of a new end demand driver, and uncertainties surrounding the macro economy."

"Based on our sector view, we expect semiconductor equipment stocks to have a strong start to 2012, but anticipate uneven pockets of weaknesses along the year. In the short term, we recommend investors continue to overweight the group; however, we anticipate signs for slower growth in 2H12 to start pressuring stocks from 2Q12 to late 2012, when visibility for a stronger 2013 emerges. In this environment, we recommend investors pick stocks with secular drivers over buying the cycle. Among names under coverage, we like Lam Research (Nasdaq: LRCX) (and acquisition target Novellus (Nasdaq: NVLS)), Nova Measuring (Nasdaq: NVMI), FSI International (Nasdaq: FSII) and Brooks Automation (Nasdaq: BRKS)."

"...We believe orders for 28nm capacity build are being pulled in, and we expect revenue in 1Q12 to grow 10-20% sequentially versus the Street’s projection for a 2.3% sequential decline. Even when we strip out ASML, the Street is only projecting an aggregate sequential growth, which we believe is too conservative. Therefore, we expect strong upside to 1Q11 guidance coming out of 4Q11 earnings report. On the other hand, we believe equipment orders are being pulled into 1H12, resulting in less revenue growth in 2H12 than the Street’s projection. Our cautious view of 2H12 is based on three main points: 1) Foundry spending on 28nm is being pulled into 1H12; 2) Foundry investments are limited to a select few at the leading edge; and 3) NAND capex could moderate by 4Q12 due to a lack of new demand driver."

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