February 27, 2012 — FBR CAPITAL MARKETS & CO. Institutional Brokerage, Research, and Investment Banking released its Q4 2011 semiconductor industry analysis, surveying chip, distributor, EMS, PC OEM, communications equipment OEM, handset OEM, and industrial firms. Their conclusion? Corrective actions in the supply chain have set up a possible H2 2012 snapback for semiconductors.
Global supply chain inventory days peaked in Q4 2011 at relatively modest levels, with inventory dollars having peaked in Q2 2011. Total inventory days this cycle peaked at levels consistent with prior inventory day cyclical troughs, indicating a well-controlled global inventory position.
|Figure 1. Total supply chain DOIs. Higher, but better than typical. SOURCE: FBR research, FactSet, and company reports (ADI, ALTR, AMCC, AMD, ATML, AVX, BRCM, CREE, CRUS, CY, DIOD, ELX, EXAR, FCS, IDTI, IKAN, INTC, IRF, ISIL, IXYS, KEM, LLTC, LSCC, LSI, MCHP, MCRL, MLNX, MPWR, MSCC, MU, NETL, NVDA, OIIM, ONNN, PMCS, POWI, PXLW, QCOM, QLGC, RFMD, SIMG, SLAB, SMSC, SNDK, STM, SUPX, SWKS, TQNT, TWLL, TXN, VLTR, VSH, VTSS, XLNX, AAPL, DELL, HPQ, IM, IBM, STX, WDC, EMC, NTAP, NOK, MMI, RIMM, CELL, MERX, BRCD, CSCO, EXTR, GLW, JDSU, SCMR, TLAB, CLS, FLEX, JBL, MOLX, PLXS, SANM, ARW, RELL, AVT, DHR, EMR, ITW, TYC, GWW, WCC, GD, NOC).|
For Q4 2011, total supply chain inventory dollars fell 2.5% quarter over quarter (QOQ), about 2.5 points better than typical. Forward DOIs grew by 1.5 days QOQ, about one day better than typical. Total DOIs are now 19% above the all-time 3Q09 DOI trough, but this should fall toward 5% above the all-time DOI trough exiting Q2 2012 as corrective actions in distribution, EMS, handset, communications equipment, and chip firms conclude. FBR Capital sees the lowest aggregate DOIs for the PC and industrial supply chains, while the highest aggregate DOIs are for the handset, EMS, and communication equipment firms.
|Figure 2. Chip firms’ DOIs grew slightly, but better than typical. SOURCE: FBR research, FactSet, and company reports (ADI, ALTR, AMCC, AMD, ATML, AVX, BRCM, CREE, CRUS, CY, DIOD, ELX, EXAR, FCS, IDTI, IKAN, INTC, IRF, ISIL, IXYS, KEM, LLTC, LSCC, LSI, MCHP, MCRL, MLNX, MPWR, MSCC, MU, NETL, NVDA, OIIM, ONNN, PMCS, POWI, PXLW, QCOM, QLGC, RFMD, SIMG, SLAB, SMSC, SNDK, STM, SUPX, SWKS, TQNT, TWLL, TXN, VLTR, VSH, XLNX).|
Chip firms’ DOIs are about 31% higher than the all-time trough achieved in 3Q09, though this should fall to 12% above the all-time trough by 2Q12, per our estimate, as the cyclical rebound accelerates and forward sales seasonally ramp.
Q4 2011 inventory dollars fell dramatically at handset OEMs (–13% QOQ, partially due to RIM inventory write-down) and distributors (–7.5% QOQ), indicating some heavy lifting here. Chip firms reduced inventory dollars (–3% QOQ), as did EMS firms (–2% QOQ).
Chip makers are shipping well below consumption levels in 1Q12, with inventory reductions already in motion that likely necessitate the need for inventory restocking in 2H12. While some near-term profit taking or digestion is inevitable, we think chip firms are setting up for a 2H12 cyclical snapback that could be stronger and longer than many expect, with higher earnings expected once chip lead times begin to expand again (Q2 or Q3 2012). Chip shortages are possible late this year.
Handset OEMs, communications equipment OEMs, and EMS firms still have more work to do, with more inventory days reductions likely in 2012. However, FBR Capital no longer considers any end market to be truly problematic for chip firms.
FBR Capital’s Q4 2011 supply chain inventory analysis, including inventory in the semiconductor, distribution, EMS, PC hardware, industrial, communications equipment, and handset sectors, uses sales rather than cost of sales as the primary DOI methodology. The model tracks inventory and sales back to 1990, and includes more than 100 vendors and $70 billion of supply chain inventory.