Longbow On What September Has In Store For Semiconductors

In a report rolled out Thursday, Longbow Research analysts Shawn M. Harrison and Gausia Chowdhury looked into the semiconductors industry.

Through the end of August, the firm’s global semi book-to-bill ratio remained stable at 1.02. Thus, the analysts are maintaining their estimates for Arrow Electronics, Inc. ARW, Avnet, Inc. AVT, Diodes Incorporated DIOD, and Fairchild Semiconductor Intl Inc FCS.

Related Link: Pacific Crest: How To Pick Semiconductor Winners

Their forecast for Vishay Intertechnology VSH, however, was trimmed after an explosion damaged one of its facilities.

The third quarter and second half of the year “hinge upon the order acceleration contacts globally anticipate for the month of September to meet a forecast for flat sequential sales,” which maintains the outlook unchanged from the firm’s prior checks, the note expounded.

What’s Changing

The report highlighted four main changes in the space:

• 1) While PC orders remain feeble, they are not contracting any further.
• 2) Contacts do not think base station orders will pick up in China until the next year, as “the anti-corruption policies and other headwinds have changed the rollout plans of the wireless carriers.” In North America, orders remain relatively low.
• 3) Initial iPhone 6s component orders are flat to up versus CY16 (0 percent to +10 percent versus iPhone 6 orders). Additionally, orders have strengthened with Chinese OEMs, but weakened from HTC and Samsung.”
• 4) Chinese distributors are either cutting or closely managing their inventory.

Investment Thesis

Below is a look at Longbow’s investment thesis in each of the five semiconductors companies named above:

• Arrow Electronics and Avnet are both Neutral rated. The experts noted that the third quarter seems to be tracking to guidance since the firm’s checks are not showing any substantial changes in semi sales and “IT spending was seasonal through August.”
• Diodes, also Neutral rated, is getting below consensus estimates from Longbow on the back of weak PC and Samsung orders.
• Fairchild Semiconductor is the only Buy rated stock in the report. The firm sees the stock reaching $20.00 within the next 12 months, with strong Apple Inc. AAPL orders supporting its forecast for the third quarter. Moreover, the robustness of orders “will help mitigate continuing weak demand in white goods and with Samsung and distributor inventory cuts, but these trends create risk in FCS meeting the CY4Q Street sales forecast even as restructuring synergies and buyback benefits build,” the analysts added.
• Vishay Intertechnology received a Neutral rating as dreary demand continues to pose a headwind for the company, and the benefits of restructuring will only manifest in 2016. “Yet, downside should be limited given $100M of free cash generation for CY15 and VSH trading below tangible book value of $9.85 per share,” Harrison and Chowdhury concluded.