What got me checking into the SEMI data is a goofy MarketWatch article featuring a fund manager who owns the FAANG type stocks at 30 multiples, but has found relative value in AMAT and LRCX, the two Semiconductor Equipment stocks that I was bullish on 1.5 years ago. I know, I know… I sold too soon and that is my issue and I have to own it. But the point is that it was hard to buy then, unlike now.
Even bigger winners for 2018? Renaissance Fund Management’s chief investment officer has found you some value for 2018!
Renaissance (noun): a revival of or renewed interest in something
Well it’s about time you got interested, dude. Truly, Applied and Lam are excellent companies that are valued relatively cheaply by their P/E ratios. But that is for a reason and the reason is that Semi Equipment is notoriously cyclical; as in ‘off a cliff’ cyclical when a cycle ends.
So MarketWatch thinks it is time to highlight AMAT and LRCX now as big winners for 2018. They even have a fund manager behind their promo. But typical of the mainstream media, it’s a fluff job to grab eyeballs. Within hours, it will be forgotten as the ad impressions are registered and a few people go off on a journey toward further research of these relative value stocks.
Here are some industry details from SEMI…
This kind of headline draws the average fund manager like a bug to a light; especially since it is true and not from an MSM source. It’s an industry source.
In an unprecedented development, 2017 fab equipment spending (new and refurbished) is expected to increase by 37 percent, reaching a new annual spending record of about US$55 billion. The World Fab Forecast also forecasts that in 2018, fab equipment spending will increase even more, another 5 percent, for a record high of about $58 billion. The last record spending was in 2011 with about $40 billion. The spending in 2017 is now expected to top that by about $15 billion. See Figure 1.
The orange line is key here. The rate of growth in a cyclical industry will be important. As I’ve beat readers over the head with, this industry was the canary in the coal mine back in 2013 to the general economic growth that would follow.
Semi Equipment had massive growth in 2017 and is projected to grow again in 2018, by a very modest amount. Now, maybe the projections are very conservative and maybe they are not. But there is a reason AMAT and LRCX trade at the ‘value’ multiples they do.
Examining 2017’s equipment spending by region, Korea, Americas, Japan, and Europe/Mideast will grow in the double digits, while other regions remain below 10 percent growth. The largest equipment spending region for both years is Korea, which jumps to about $19.5 billion in spending for 2017 from the $8.5 billion reported in 2016. This represents an astounding 130 percent growth year-over-year.
In 2018, the World Fab Forecast report predicts that Korea remains the largest spending region, while China moves up to second place with $12.5 billion (66 percent growth YoY) in equipment spending. Figure 2 (below) shows which companies contribute the largest share of worldwide equipment spending.
Anyway, as I said I only got on the subject because I saw the puff piece at MarketWatch. I thought it was worth drilling down a bit deeper into the situation as a little antidote to the MSM in this case. Taken at face value, the article is telling you to buy AMAT and LRCX for big gains in 2018 after massive 37% industry growth in 2017; with next year’s projected growth at only 5%. He shakes his head…
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