Gaping Holes in the SOX Recovery Story Part 1
By Herb Greenberg
Senior Columnist
01/03/2003 10:06 AM EST
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Say this for Tom Kurlak: He's persistent.
Yesterday he posted another column on why chip stocks are undervalued. Though I don't know Kurlak, I respect him based on his reputation.
What I don't understand is his talk about stronger demand. In reality, information technology managers are talking about lower budgets this year -- not higher ones. And the economy certainly isn't showing any strong signs of improvement.
Let's take a look at some assertions Kurlak makes in Thursday's piece on RealMoney.com. Then we'll get a point-by-point reaction from my best chip source -- who I think is every bit as good as Kurlak in analyzing the industry and who is short as many chip stocks as Kurlak is long. The source, a hedge-fund manager who isn't allowed to speak on the record, presents an argument that makes the bullish case on this sector seem a lot less compelling.
Kurlak: "Evidence of improving industry sales is emerging, thanks to strengthening end demand, particularly in cell phones and personal computers, which together account for nearly half of total semiconductor consumption."
Chip source: "Cell phone and PC demand was by any account outright weak this holiday season. Every wireless service provider has disappointing net adds. People needed to give phones away to sell them. PC demand and retail demand overall stunk -- this was the worst Christmas in the last 10 years, period. Nokia's (NOK:NYSE - news - commentary - research - analysis) mid-Q update was a huge disappointment to people.
As Kurlak said, "cell phones and PCs account for 50% of semiconductor demand. Given demand there is actually so weak, we are in for more trouble."
Kurlak: "There's just no slack in the supply chain between factory and customer. One large chip distributor, Avnet (AVT:NYSE - news - commentary - research - analysis), reports having the lowest inventory-to-sales ratio in its history."
Chip source: "Inventory-to-sales level at Avnet is so low because they are having a liquidity crisis, because end demand is so weak they are trying to lower inventory to generate cash. Also, Avnet expects Q1 sales to be very weak and is lowering inventory so they have the proper amount on a forward basis. Less inventory for lower sales."
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