Technology

Should Investors Really Worry About Taiwan Semi Capex Cuts?

For industry leaders, cutting capital expenditures (capex) has the potential to affect other companies upstream. Many question how the semiconductor industry will react to Taiwan Semiconductor Manufacturing Co. Ltd. (NYSE: TSM) cuts in its guidance, in the midst of a dwindling personal computer (PC) market.

While the headline news might be viewed negatively for semiconductor capital equipment stocks, Merrill Lynch remains bullish on what it calls “the semicap space” and views the weakness as an attractive buying opportunity.

According to the brokerage firm, Taiwan Semiconductor, Intel Corp. (NASDAQ: INTC) and Samsung are three major spenders on capital equipment. Merrill Lynch believes that Taiwan Semiconductor’s capital spending likely will account for about 18% of the overall semiconductor industry capex in the 2015 calendar year, compared to 17% in the 2014 calendar year. Therefore the key front-end names like Applied Materials Inc. (NASDAQ: AMAT), ASML Holding N.V. (NASDAQ: ASML), KLA-Tencor Corp. (NASDAQ: KLAC) and Lam Research Corp. (NASDAQ: LRCX) are exposed to Taiwan Semiconductor’s capital spending budget.

Note that, Taiwan Semiconductor reported Thursday morning and lowered its calendar year 2015 capital spending guidance range to $10.5 billion to $11 billion, from the previous forecast of $11.5 billion to $12 billion. As a result Merrill Lynch lowered its forecast for the company’s capex by 4% to $11.0 billion from $11.5 billion. There is no change to the brokerage firm’s 2016 calendar year capital spending forecast of $12 billion. Ultimately this could lead to some scaling back in the industry, if only slightly.

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Considering Taiwan Semiconductor and Intel, Merrill Lynch’s wafer fab equipment (WFE) forecast is $35 billion, up 9% year over year. This could end up more realistically around $33 billion to $34 billion.

Merrill Lynch and Bloomberg estimate the breakdown within the semiconductor sector in terms of a company’s exposure to Intel purchasing:

  • About 14% of Applied Materials 2014 fiscal year sales
  • Less than 10% of ASML 2014 fiscal year sales
  • About 15% of KLA-Tencor 2014 fiscal year sales
  • About 14% of Lam Research 2014 fiscal year sales
  • About 16% of Nanometrics Inc. (NASDAQ: NANO) 2014 fiscal year sales
  • About 15% of Tokyo Electron 2014 fiscal year sales
  • About 11% of Ultratech Inc. (NASDAQ: UTEK) 2014 fiscal year sales

24/7 Wall St has included some additional color on a couple of the major players in the semiconductor industry.

Intel shares were relatively flat at $32.88 Thursday. The stock has a consensus analyst price target of $34.85, in a 52-week training range of $25.74 to $37.90. Intel was maintained as a Buy after earnings with a $38 price target from Merrill Lynch.

Shares of Taiwan Semiconductor were down 0.9% at $23.30, on a 52-week trading range of $19.39 to $25.32. The stock has a consensus analyst price target of $24.20. Merrill Lynch has a price target of $29.24, and the price target takes into account:

Our PO of NT$178.72 (US$29.24/ADR) is based on 14.6x our forward 12M EPS estimate, raised from13.3x previously, reflecting 1) a healthy growth projectile for the global logic ICsector and TSMC, 2) continued share gains by TSMC given its largest, lowest cost manufacturer status. A heated up supply chain, driven by much stronger global macro-economic growth could stretch the PE to 16x.