Northwestern University's Kellogg Graduate School of Management
. Glavin has followed the semiconductor industry at
Credit Suisse First Boston
since 1998. He has worked in a similar capacity for
Deutsche Bank Securities
. Before that, he worked at
as a product-marketing engineer and business analyst. He also held research and trading positions in the fixed-income department of
Fidelity Management and Research
Industry Outlook and Style
Because semiconductor manufacturers "left the production spigot on after demand started to dry up," says Glavin, the industry will need to spend the first half of 2001 reducing the resulting "huge overbuild. I'm looking for inventories to get a little worse before they get better."
Glavin figures that in the first quarter and maybe even in the second, analysts will continue to adjust their expectations for revenues and earnings downward. He describes the second quarter as "more an equilibrium quarter, when demand and production come back into line, as production is adjusted to meet more realistic revised numbers." All in all, he believes revenue growth, which was more than 35% in 2000, will cool down to 5% or 6% in 2001.
The CSFB analyst expects that once the April reporting period is over, he will lift his underweight bias on the sector, which he has held since December. But "the return to healthy demand in this sector is contingent on solid economics," he observes. "Personal computers, consumer electronics and industrials are all sensitive to economic conditions. We need a good economic environment to get semiconductors sold into those sectors to start growing at a solid rate."
In the meantime, for those investors who want -- or need -- to put money in semiconductor stocks, Glavin points to three communications-related semiconductor plays --
Applied Micro Circuits
-- that he recommends buying now for their long-term potential.
Two other semiconductor stocks that make specialty chips for the communications sector --
RF Micro Devices
-- have, in his view, been "beaten up too much and are good buys based on their likely upside over a six-month time horizon," according to Glavin. (Credit Suisse First Boston has provided investment banking services to Applied Micro Circuits, Centillium, C-Cube and RF Micro Devices.)
Applied Micro, TranSwitch and Centillium have wonderful fundamentals, but they are being treated by the market like "the proverbial baby that has been thrown out with the bath water," says the CSFB analyst.
Applied Micro, which makes chips in the high-speed opto-electronics area, has been the beneficiary of a trend toward outsourcing by makers of communications products. In addition, AMCC is increasing its market share with a number of recent "design wins," as Glavin puts it. Moreover, each one of these designs has a high dollar content now that AMCC has acquired two companies,
, whose products help AMCC make better chips, thus improving margins.
TranSwitch sells chips to communications companies for their network infrastructures. The company has customers not only in the U.S., but also in Europe, where the infrastructure upgrade is slightly behind that in North America. European customers include
buildout). Glavin has set a 12-month price target of $75.
Centillium, which makes chips for digital subscriber lines, has benefited from the intense global interest in this broadband service, says the analyst. (Still, it should be noted that, like cell-phone makers, who are seeing a sales slowdown, many DSL companies are
has addressed both subjects in many stories.) Because the company "offers leading chip solutions that have the highest density and that incorporate domestic and international standards," says Glavin, it has won design contracts from
. Centillium's stock currently trades in the $30s. Glavin hopes it will reach his $100 price target within 12 months.
C-Cube makes video compression/decompression chips that go into DVD set-top boxes and other applications. Meanwhile, RF Micro Devices makes radio frequency chips for wireless and broadband applications.
Like AMCC, C-Cube has benefited from the outsourcing trend -- in this case, the outsourcing of digital video chip production. As for RFMD, it is benefiting from growth in the wireless market, both handset and infrastructure. Also, the company is considered a leading provider of module solutions -- one-stop solutions for original equipment manufacturers (such as
, which is RFMD's largest customer). According to Glavin, module solutions lower costs, accelerate time to market and increase performance.
Favorite stock for next 12 months:
Applied Micro Circuits
12-month price target:
"We think AMCC will grow its revenues at least 75% in the next fiscal year, ending March 2002, to at least $935 million. But that's a conservative estimate. It's possible they'll climb as high as $1.1 billion -- double the expected March 2001 revenue of approximately $535 million, a figure that itself will be up 125% over the previous fiscal year. This will be contingent on economic conditions. Because of the higher dollar content per design win (margins) that AMCC acquisitions Cimaron and MMC Networks bring to the table, we think operating income will grow at an even faster rate than revenues -- more than 80% -- between fiscal 2001 and fiscal 2002."
Rate Their Stock Picks:
Which stock do you like best?
Niles: RF Micro Devices
Glavin: Applied Micro Circuits
Peck: Analog Devices