SAN JOSE, Calif. -- Business is improving in the fab tool sector.
Two large suppliers--Cymer Inc. and KLA-Tencor Corp.--have recently raised their forecasts. Now, backend tool giant Kulicke & Soffa Industries Inc. has raised its revenue outlook for its fiscal fourth quarter ending Oct. 3.
The company now expects net revenue for the fourth fiscal quarter to be in the range of $100-to-$105 million, an increase from the previously forecasted range of $85-to-$90 million.
In a statement, Scott Kulicke, chairman and chief executive, said: "The recovery in overall business conditions that began near the end of our March quarter is continuing. Improvements are being seen in all areas of our business, particularly in ball bonders, wedge bonders and expendable tools."
Another vendor, Rudolph Technologies Inc., has received orders for 20 tools from the world's four largest outsourced assembly and test (OSAT) companies and major foundry companies. The orders are for Rudolph's automated macro defect inspection equipment.
"These orders represent a level of activity not seen since Q3 of 2008," said Ardy Johnson, vice president of marketing at Rudolph, in a statement.
Business is also looking up in semiconductors. ''It now appears that excess inventory from lower demand levels was worked down faster than expected in 2 plus quarters (December '08 and March '09),'' said Broadpoint AmTech analyst Doug Freedman, in a report.
''The semiconductor market is likely to continue to recover and may see better than expected September and December results -- likely driven by supply chain balancing as there are now spot shortages causing buyers to rebuild depleted inventories and increase the order rates (potentially above demand levels),'' he said.
''Given the volatility of the semiconductor sector and early cycle multiples being applied, we believe there is a good risk of inflated expectations (and slower than expected growth -- maybe even pronounced seasonality) as a result of order adjustments required to match sell-through rates,'' he said.
As a result, Freedman is downgrading Nvidia, ADI and AMD to ''Neutral'' from ''Buy.''
Risk/reward looks less favorable to us: While many semi stocks have 20%+ upside, we cannot ignore the fact that new money is often looking for 30-40% upside before taking on the risk of calling the demand cycle correctly. One of the cornerstones to our call today is that investors should take a more measured approach to semiconductor investing and play a little defense at this time of year. We would often advise a seasonal rotation into industrials, but this year that trade was effective in 2Q, ahead of recent commentary regarding better than expected broad-based demand.
Our present revenue estimates could prove too low as the recovery could continue to occur faster than expected. However, EPS results are not likely to surprise by as much as cost controls continue to unwind and inventory from underutilized manufacturing works through the income statements.
As a result, we are downgrading NVDA, ADI and AMD to Neutral from Buy. We are revising estimates and raising ISIL's price target to $21. We are raising our price target on OVTI to $20.