Profit-focused semiconductor manufacturers are unlikely to invest as much as they planned this year on their plants, and a major expansion of 65-nanometer foundry capacity won't occur until late next year, UBS said in downgrading a number of chip-equipment stocks Monday.
( VSEA) to neutral from buy. Price targets on all four were also cut.
"Despite the strong order trends widely expected in the first quarter of 2006, we do not believe semiconductor capital equipment stocks will rally given increased skepticism about foundry capex in the second half of 2006," UBS wrote. "Our recent discussions with industry contacts now suggest that both
Semiconductor Manufacturing International Corp.
will each likely spend 25% less capex than the $1 billion that each budgeted."
The brokerage said chip manufacturers currently are more interested in return on investment and profitability than scale, and will use lower capital budgets as a way of achieving these goals. "In addition, we now expect that the four major foundry customers will spend heavily on new 65-nanometer capacity additions in the second half of 2007 at the earliest, compared to our prior view of the first half of 2007."
UBS believes the semiconductor equipment industry is in the final stages of an order upcycle, with unit growth in integrated circuits likely to peak in the current quarter. "With foundry customer capex no longer back-endloaded, we now estimate that third- and fourth-quarter equipment orders will decline 5%-10% quarter-over-quarter as the industry enters a short duration and low-amplitude downcycle."