Semi Optimistic

Here's why S&P expects semiconductor stocks to outperform the market over the next six to 12 months

By Sam Stovall

Five of the 10 best performing industries for the week ended August 3, 2001 were from the Information Technology Sector. The two best performers were Semiconductors and Semiconductor Equipment. What's more, the Semiconductor Equipment group was among those sub-industries within the S&P Super 1500 that posted six-month (26-week) price performances that were in the top 10% of all 115 sub-industries.

So guess which group will be featured this week? Tom Smith is our Semiconductor Chip/Equipment analyst. Below is commentary from his industry outlook on why he is positive on the group.

"We expect month-to-month order comparisons to stabilize through the summer, as the absolute level of orders are nearing cycle trough levels. Although a bottom for order levels may be at hand, the timing of a meaningful uptick in orders is open to speculation. We believe orders could pickup by late 2001 if the global economy strengthens. We expect stock prices for this often-volatile group to outperform the market over the next six to 12 months.

Long-term fundamentals for the sector remain strong. Rapid growth in semiconductor-rich applications, such as PCs, cellular phones, automobiles, and appliances, portends continued strong demand for semiconductor equipment. We expect chip sales to top $280 billion by 2004, up from $204 billion in 2000.

Industries Co. STARS
Auto Parts & Equipment SUP 4
Catalog Retail LEN 3
Computer & Electronics Retail BBY 3
Construction & Farm Machinery CUM 4
Environmental Services WMI 4
Footwear RBK 4
Home Improvement Retail HDI 5
Homebuilding LEN 5
Motorcycle Manufacturers HDI 4
Semiconductor Equipment AMAT 5
Specialty Stores BKS 5

To support this growth, chip makers will need to replace existing equipment with manufacturing tools that can support new technological requirements. Three important demand drivers include the ongoing shift to 300 millimeter wafer processing, the introduction of copper interconnect materials, and the continued shrinking of device geometries from 0.25 micron to 0.18 micron and below. We expect the worldwide market for semiconductor capital equipment in 2001 to be more than 25% below the $48 billion in sales in 2000, which was more than sales in 1999 and 1998 combined.

The semiconductor equipment industry remains an attractive cyclical growth market, and will continue to benefit from the proliferation of electronic devices in our everyday lives. We recommend that investors focus on well-established companies with strong management track records. Companies that we prefer include the larger players that have strong financial resources and are expanding their product lines to take advantage of growth opportunities."

Stovall is Sector Strategist for Standard & Poor's

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