us semiconductors (intel, amd and applied materials)

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U.S. Semiconductor Industry

Sebastian BudijantoSiantoro ChandraEmily ChiangAmbrosio Lina

Industry & Market Analysis

Definition

Materials that has electrical conductivity between a conductor and an insulator

The most common semiconductor materials are silicon and germanium.

Example: Computer chips, both for CPU and memory

Product Categories

Integrated Circuits (IC) 85% of marketCPU and PC memory (DRAM, SRAM, Flash

Memory)

Discrete DevicesTransistors, diodes, resistors

OptoelectricsLED, Optical coupler, laser diode

Business Models

FablessFocus on marketing and product development

FoundriesManufacture and sell to other companies

Integrated Device Manufacturer (IDM)60% of marketDevelop, produce and market productsIntel and AMD

Industry Characteristics

Short product lifecycleMoore’s LawThe number of transistors in IC doubles every

18 monthsIncreasing R&D expenditure

Development of nanotechnologyIncreasing foreign consumption

In 3rd Quarter 2004, Asia Pacific has nearly 40% market share

Industry Characteristics

Large IDMs start shift to fablessE.g. Broadcom & Xilinx

Outsourcing production to foundriesE.g. TSM and IBM

More concentrated customer bases Growth direction parallel to PC and

telecommunication industry

Annual Sales

Annual Industry Sales 1994-2003

0

50000

100000

150000

200000

250000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Industry Statistics

Market Capitalization = $ 556 BRevenue (est.) = $ 180 BFinancial RatiosProfitability and management

effectiveness

Financial Ratios

Price /Earnings 27.263Price/Book 3.645Current Ratio 4.007Debt/Equity 0.102

Profitability and Management Effectiveness Gross Margin 53.076% Operating Margin 22.065% Net Profit Margin 22.415% ROA 13.678% ROI 11.604% ROE 15.022% YoY Qtrly Rev Growth 32.7% YoY Qtrly EPS Growth 42.8% Dividend Yield 0.6%

Cost Structure

Leaders by Market Capitalization

1. Intel Corp $ 147.7 B

2. Texas Instrument Inc. $ 42.7 B

3. TSM Co. Ltd. $ 38.2 B

4. Applied Materials Inc. $ 27.7 B

5. STMicroelectronics NV $ 17.2 B

21. AMD $ 6.02 B

Microprocessor Market share

Rank Supplier Market Share

1 Intel 81.90%

2 AMD 15.10%

3 Other 2.30%

Flash memory market share

Rank Supplier Market Share

1 Spansion 27.30%

2 Intel 18.10%

3 ST Microelectronics 12.30%

4 Sharp Electronics 11.50%

5 Toshiba 5.40%

6 Renesas Technology 5.00%

7 Silicon Storage Technology 4.50%

8 Samsung 3.90%

9 Macronix International 3.50%

- All others combined 9.50%

Source: iSupply Market Analysis (September 2004)

Leaders by Sales(2003 Annual Report)

1. Intel Corp. $ 30.1 B2. Flextronics Int. Corp. $ 15.9 B3. Texas Instruments Inc. $ 12.2 B

8. Applied Materials Inc. $ 4.5 B

10. AMD Inc. $ 3.5 B

Market Composition

Year 2003 Recap

US Sales = $80 BillionU.S Market Share = 48% of $163 BU.S. Jobs = 226,000 (estimate)% of Sales Outside U.S. = 73%R&D Investment = $22.82 Billion, 14% of

Sales (estimate)

Global Market Share

Philadelphia Semiconductor Index (SOXX) – 5 year

SOXX – 2 Year Range

SOXX – 1 Year Range

SOXX & DJI – 5 Year range

SOXX & GSPC – 5 Year Range

Environment

R&D DevelopmentsTariffs and export regulationsBroadband internetEmergence of China

R&D Developments

Increase in R&D funding by Congress$5.6 billion for NSF (increase of 5%)20% projected increase in 2005 for

nanotechnology$12.6 billion for Department of defense

(increase of 12%)

R&D tax credit and Equipment depreciation tax reforms

Tariffs & Export Regulations

Elimination of semiconductor tariffs in 2002

SIA is lobbying for PTA (President Trade promotion Authority)Negotiating free trade agreement in Latin

America and Asia Pacific

Broadband Internet

Availability of broadband benefits US economy by hundreds of billions dollars

High Tech Broadband Coalition won over FCC in deregulation of broadband.

Emergence of China

3rd largest market share for semiconductor products

Predicted to be 2nd highest in 2010 the U.S.

Subject to WTO regulationsAnti-dumping lawPatent, standard, and quality enforcementTrading and investing regulations

Industry Forecast

Development for industry sectorsPC industry

Projected 14% growthTechnological advancement

TelecommunicationProjected 14 % growthIncrease use of wireless telecom products

Consumer productsProjected 30% growthIncrease use of digital technology

Consumer Products

Advanced Micro Devices Inc. (AMD)

Company Overview

Founded in 1969, based in Sunnyvale, California

Global supplier of integrated circuits (IC)Personal, network computer, and

communicationsFacilities in US, Europe, and Asia

Mission Statement

Purpose “We empower people everywhere to lead

more productive lives.”

ExecutivesDate joined

Hector de J. Ruiz, Ph.D.Chairman of the Board, President and Chief Executive Officer

January 2000

Dr. Bertrand CambouExecutive Vice President and President and CEO, Spansion

January 2002

William T. Edwards, Ph.D.Senior Vice President and Chief Strategy Officer

January 2004

Thomas M. McCoy Executive Vice President and Chief Administrative Officer

January 1995

Dirk Meyer Executive Vice President, Computation Products Group

1996

Patrick MoorheadVice President, Global Marketing, Microprocessor Business Unit, Computation Products Group

2000

Iain MorrisSenior Vice President, Personal Connectivity Solutions Group

2004

Henri RichardExecutive Vice President, Worldwide Sales and Marketing

April 2002

Robert J. RivetExecutive Vice President and Chief Financial Officer

2000

Marty SeyerCorporate Vice President and General Manager, Microprocessor Business Unit, Computation Products Group

2002

Fred Weber Corporate Vice President and Chief Technical Officer

1995

Products Overview

Microprocessors Desktop PC

AMD Athlon 64 FX, AMD Athlon 64, AMD Athlon XP, AMD DuronTM

Mobile:AMD Athlon 64, AMD Athlon XP-M

Servers & Workstation:AMD Opteron, AMD Athlon MP

Flash Memory Spansion memory, Multi-chip packages

Personal Connectivity Solutions AMD Geode, AMD AlchemyTM

Competition

Microprocessor Intel

Flash memory Intel, Samsung, Toshiba, ST Microelectronics N.V.,

Sharp Electronics Corporation, Renesas Technology, Silicon Storage Technology, and Macronix International

Personal Connectivity Solutions Hitachi, Intel, Motorola, Inc., NEC Corporation,

Toshiba, Transmeta, and Via Technologies

Strategic Partners

Formed FASL LLC (now Spansion LLC) with Fujitsu Limited Design, produce, and market flash memory products

Agreement with IBM Jointly develop new logic process technology

Formed AMTC and BAC with Infineon Technologies AG and Dupont Photomasks, Inc. Constructing and operating advanced photomask

facility

Sales and Marketing

Distribution: Direct sales force Third party distributors

Avnet Inc. accounted for 13% of 2003 consolidated net salesFujitsu Limited accounted for 13% of 2003 consolidated net

sales Independent representatives

International sales 80% of net sales in 2003 73% of net sales in 2002 67% of net sales in 2001

Sales and Marketing (cont)

Expanding to ChinaRegional headquarterEstablished relationship with OEM in China

PricingAMD sells to distributors under terms allowing

the distributors certain rights of return and price protection on any inventory of our products held by them.

Miscellaneous

Intellectual properties5,900 patents and 2,000 pending patents

Employees7,400 non-unionized employees (AMD)6,900 partially unionized employees (FASL

LLC)

Restructured in 2001 and 2002

AMD’s Demand Expectations

Worldwide demand for PC microprocessors will increase in 2004Replacement cycle for older PC systemLower-priced PC systemEnhanced product featuresImproved economic condition

Goal

MicroprocessorIncrease market acceptance

Flash memoryIncrease market acceptance

Personal Connectivity SolutionsContinue provide cost-effective product

Financial

Financial cont’d

Financial cont’d

Financial cont’d

Financial cont’d

Company Snapshot

As of Nov. 5, 2004

Market Capitalization

Close Price (As of November 5, 2004 16:04 ET)

52 Week High

52 Week Low

Shares outstanding

-basic

-diluted

Price to book value

-basic

-diluted

Current book value

-basic

-diluted

$6,016,830,000

$17.09

$18.50

$10.76

354,348,000

417,576,000

2.36

2.78

$7.24

$6.16

Stock Performance (1yr)

Stock Performance (2yr)

Stock Performance (5yr)

Q3 2004 2003 2002 2001

Book value per share

Price to Book ratio

Current Ratio

Quick Ratio

Debt to Equity Ratio

Asset Return

ROA

ROE

$6.16

2.78

1.6198

1.1913

1.8320

0.1740

0.0062

0.0170

$7.03

1.9971

1.5167

1.9095

0.1374

-0.0107

-0.1126

$7.21

1.6759

1.3324

1.3144

0.1187

-0.0574

-0.5281

10.69

1.7909

1.5013

0.5855

Balance Sheet Analysis

Income Statement Analysis

Q3 2004 2003 2002 2001

Gross profit margin

Net profit margin

Operating margin

RD&E

SG&A

EPS

-basic

-diluted

Price to earning

-basic

-diluted

0.4046

0.0354

0.0552

0.4605

0.4032

$0.1234

$0.1050

138.46

162.75

0.3387

-0.0780

-0.0663

0.7148

0.4927

-$0.7912

-$0.7912

-$21.60

-$21.60

0.2193

-0.4831

-0.4543

1.3800

1.1331

-$3.8063

-$3.8063

0.3346

-0.0156

-0.0150

0.4999

0.4762

-$0.1822

-$0.1822

Value Drivers

Research and developmentMarket share of Spansion Flash memorySemiconductor demand expectations

Analysts Recommendation

 Recommendations  Current  1 Month Ago  2 Months Ago  3 Months Ago

 Strong Buy 5 5 5 7

 Moderate Buy 0 0 0 0

 Hold 12 12 12 11

 Moderate Sell 2 2 2 2

 Strong Sell 3 3 3 3

 Mean Rec.  2.91  2.91  2.91  2.75

(Source: MSN Money)

Recommendation

Analysis:Too much debtNo clear business planIntense competition

ConclusionSell

Applied Materials Inc. (AMAT)

Company Overview

Established in 1967 The world’s largest supplier of products

and services to the global semiconductor industry (develop, manufacture, market, service)

One of the leading information infrastructure providers

Subsidiary: AKT Inc. & Etec Systems Inc. Hasn’t declared or paid cash dividends

Top Competitors

Tokyo ElectronNikon CorpKLA-Tencor CorpASLM Holding N.V.Canon Inc.LAM Research

Sales Comparison

0

2000

4000

6000

8000

10000

12000

1998 1999 2000 2001 2002 Q32003

Year

Rev

enu

e

APPLIEDMATERIALS

TOKYO ELECTRON

KLA - TENCOR

LAM RESEARCH

Note: Intel Corp (13% of 2003 Net Sales)

Management Overview

Michael R. Splinter, CEOJoined April 30, 2003. 30 years in the industry; 20 years with Intel

James C. Morgan, Chairman of the Board of DirectorJoined 1976

Nancy Handel, CFO & Group VPJoined 1985. Named CFO October 2004

Franz Janker, Senior VP Sales & MarketingJoined 1998

Firm Objective

To be the leading supplier of semiconductor fabrication solutions worldwide-through innovation and enhancement of customer productivity with systems and service solutions.

AM’s long-term growth strategy requires continued development of new manufacturing products

Operating Costs

Operating Costs

48%

17%

16%

19%

Research,development andengineering

Marketing andselling

General andadministrative

Restructuring,asset impairmentsand other charge

Gross margin: $1,604,455 (35% of net sale)

Research, development and engineering: $920,618 (20.6% of net sale)

Marketing, selling, general and administrative: $625,865 (14% of net sale)

(2003 Annual Report)

RD&E Investment (% of Revenue)

Products Overview

Chemical Vapor Deposition (CVD) Chemical Mechanical Planarization (CMP) Electrochemical Plating Epitaxial and Polysilicon Deposition Inspection Ion Implantation Manufacturing Execution Systems (MES) software Mask Pattern Generation, Etch, and Inspection systems Metrology Physical Vapor Deposition (PVD) Plasma Etching Rapid Thermal Processing (RTP) Systems to make Flat Panel Displays (FPDs) Wet Cleaning

Financial Highlights

Net Sales (Year)(in thousands)

7,343,248

5062312 4477291

0

1000000

2000000

3000000

4000000

5000000

6000000

7000000

8000000

2001 2002 2003

Financial Highlights

Net Sales (Quarterly) (in millions)

373.3

15.5 82.4

440.6

0100200300400500

Q4'03 Q1'04 Q2'04 Q3'04

Financial Highlights

Net Income (Yearly)(in thousands)

-149117

507829

269004

-200000

0

200000

400000

600000

2001 2002 2003

Financial Highlights

Net Income (Quarterly)(in millions)

1221

2236.21555.4

2018.1

0500

1000150020002500

Q4'03 Q1'04 Q2'04 Q3'04

Financial cont’d

Operating Income

4.3

613.5

97.4

515

0

200

400

600

800

Q4'03 Q1'04 Q2'04 Q3'04

Net Sales by Region

26%

18%

16%

15%

13%

12%

North America

Japan

Europe

Korea

Taiwan

Asia-Pacific

Note: 58% to Asia

Bookings by Region

Business Trend

AMAT Stock Price (1yr)

AMAT Stock Price vs. SP500 (4yr)

AMAT vs. Industry (return)

AMAT:US         S5SEEQ:IND

Summary Balance Sheet(unaudited)

Balance Sheet Highlights(2003 Annual Report)

Cash, Cash Equivalents, and Short-term investments total $5.5 billion (53% of total assets)

Total liabilities total $2.2 billion(21% of total liabilities and shareholders equity)

Retained Earnings total $5.8 billion (56% of total liabilities and shareholders equity)

Cash & Revenue Trend

Summary Income Statement(unaudited)

Analysis of Financial Statements (Nov 5, 2004)

Enterprise Value: $21.61 billionRevenue: $7.03 billionGross profit: $1.60 billionMarket Cap: $27.65 billionBeta: 2.305Price to book value of equity: 3.03

Data Provided by Reuters

Analysis of Financial Statements Cont’d

P/E: 30.78 (Estimated EPS $0.53 for 2004)

(EPS negative in year 2003)

EPS: 0.26 (Q3, 2004)

ROE: -1.9% (2003 Annual Report)

Shares outstanding: 1,698,233,000 Free Cash Flow: $536,474,000 (2003) ($0.32/share)

Cash Flow from Operation: $801,754,000 (2003)

Value Drivers

Research and DevelopmentStrong Cash FlowsDominant Player in the industry

News

Metron Technology N.V., a leading global service provider of marketing, sales, service, and support solutions to semiconductor materials and equipment suppliers and semiconductor manufacturers, had entered into a definitive agreement pursuant to which AM would acquire the worldwide operating subsidiaries and business of Metron.

Cont’d

Q1’05Revenue: $62.7 millionGross margins: 21.8%Net loss: $0.6 million

Fair P/E Raito

Using Graham’s model:

P/E Ratio: 22.68

P/E Estimate (2004):30.78

Slightly overpriced

Recommendation

HOLD

Cash Flow; Debt Rebound (New Orders increase to $2.46B, Net

Sales increase to $2.24B) Industry expectation P/E Ratio Return vs Industry Acquisition 2004 Final Report

Intel Corporation(INTC)

Background

Incorporated in California in 1968 (rise of the computer age)

World’s largest semiconductor chip-makerCurrently, most of their products are sold

or licensed worldwide.Two lines of business: Chip (IC)

Manufacturing, and Communications and Computing.

Business Profile

Provide key components for networking and communications infrastructure technology. Communication Components

Design and provide products with faster processor performance and improved capabilities. Microprocessor

Mission: Become the preeminent building block supplier to the Internet economy

Major Products

Microprocessors, chipsets, boards, flash memory, application processors used in handheld devices, cellular baseband chipsets.

Networking and communications products, optical components and network processing components, embedded control chips

Major Customers

Computer system, cellular, telecommunications and network communication equipment manufacturers (OEMs)

PC and network communication product users (retail, reseller, OEMs)

Other manufacturers

Geographic Revenue (millions)

Q3 2004 Q2 2004Q3 2003

Americas $1,799 $1,956 $2,168

(21%) (24%) (28%)

Asia-Pacific $4,014 $3,661 $3,266

(48%) (45%) (42%)

Europe $1,886 $1,665 $1,683

(22%) (21%) (21)

Japan $772 $767 $716

(9%) (10%) (9%)

Product Revenue (millions)

Q3 2004 Q2 2004Q3 2003

Microprocessor$5,928 $5,751 $5,719

Chipset, Motherboardand other $1,210 $1,023 $1,140

Flash$ 638 $ 587 $ 389

Operating Segment (millions)

YTD 2004 YTD 2003

Architecture BusinessRevenue $20,937 $18,481Income $ 8,586 $ 6,633

Communications GroupRevenue $ 3,663 $ 2,893Income $ (596) $ (681)

OtherRevenue $ 11 $ 26Income $ (760) $ (981)

Market Analysis

Wi-fi phenomenon – Intel’s PRO/Wireless 2915ABG adapter. Supports three WiFi standards: 802.11a, b, and g (these are the standards for the average home user)

Rising handheld industry – increasing demands on handheld digital device (cell phones, PDA’s) capabilities with more powerful processors

Management

Andrew Grove-Chairman Founder

Craig Barret-CEO Came in 1974. Voted into BOD in 1992.

Paul Otellini-President Came in 1974, became president in 2002.

Andy Bryant-CFO Joined Intel in 1981. Became CFO in 1994.

Sean Maloney-(ITC) Gen Mgr Joined Intel since 1982. Became head of ITC in 2001.

Price History (1 year)

Last price as of Nov. 7,2004: $23.360

Intel vs. Industry Returns

  INTC:US         S5SECO:IND

Revenue vs Income chart

$-$5,000$10,000$15,000$20,000$25,000$30,000$35,000$40,000

2004(year

todate)

200320022001200019991998

Revenue

Net Income

Cash Flow Statement Highlights

Year End Cash Flow

$-

$2,000

$4,000

$6,000

$8,000

$10,000

2003 2002 2001 2000 1999 1998

Year End Cash Flow

Fundamentals

Outstanding Shares: 6,323.00 MillionEarnings Growth Rate (quarterly): 29.3%Market Cap: $ 147,705.3 MillionROE: 15.389Trailing P/E: 20.437 Last Dividend Reported: 0.04 cashDividend Yield: .685Year estimated EPS: $ 1.11

Financial Model:

• FCFF= CF(operations)-Exp(C)+ Interest*(1-tax rate)

– 2003: $ 8,004.54 (in millions) or $ 1.21 /share– 2002: $ 4,569.84 (in millions) or $.69 /share– 2001: $ 1,712.42 (in millions) or $.25 /share

Recommendation

P/Etrailing * FCFF = 20.43 * $1.21 = $ 24.72

• Therefore.. Since last price is $ 23.36,

BUY!

The Fisher Approach

Company has had a stable operating structure (ratio of revenue-income stayed consistent)

All the head managers and officers have been with the company for at least 22 years.

Majority of revenue come from Asia-Pacific Region which has steadily increased.

**Prospects look promising. Assuming no unforeseen circumstances, buy and hold for the long run.

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