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
As of Nov 5, 2004
Market Capitalization (000) $7,641,271
Close Price $16.28
52 Week High $25.62
52 Week Low $15.36
Price Change - 5 Day 1.1%
Price Change - 4 Week 0.4%
Price Change - 26 Week -12.8%
Price Change - 52 Week -35.5%
Price Change - YTD -25.7%
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.