Cut in chip manufacturers capital spending (page 1 of 3)

United States

Boeing Co. (BA, $37.13, CSFB recommendation: Buy): as labour contract deadline approaches (September 1st contract expiration) we wish to look back at what prior strikes have meant relative to stock price performance. History suggests it's generally worthwhile to buy BA after the strike.

A look at the three previous strikes in the past 13 years suggests BA stock acts relatively unpredictably to work stoppages. The 2000 engineer strike had a substantive negative impact on the stock, which subsequently recovered.

It is difficult to see what would happen. On the one hand current low demand from airlines, with airlines inclined to put off deliveries if possible, the company is not as pressured to settle quickly, and soft job market and poor economic climate may be a mitigating factor for machinists. On the other hand, the strike fund balance, which guarantees $115 per week to every machinist, suggests adequacy to fund a sustained strike, and public sentiment weighs in favour of labour pushing back.

We would recommend to wait until the situation becomes clear. Currently, 2/3 of the machinists would have to reject Boeing's offer, expected Aug. 27-29. On business side, the company is suffering from weak orders from civil aviation. Airliners reduce their orders in order to cut costs. Furthermore, after US Airways Group Inc. filed for chapter 11, concerns rose that it could be the beginning of a "bankruptcy wave" in the airlines industry. For BA's commercial aerospace business, it is expected that cycle may through in 2003-early 2004. Finally BA's military division continues to generate profit. The company earned some contracts, which should insure division efficiency for years. Hold

General Electric Co. (GE, $32.25, CSFB rating: Buy) reported that order volume for its short-cycle businesses grew by 5%-10% y-o-y in July. Order volume in the Americas, which accounts for slightly over 60% of GE's short-cycle orders, grew at 5%-10%, while order volume growth in Europe and Asia, which account for roughly 20% of GE's short-cycle orders each, grew at 20% and 10%-15% respectively. Compared with June, these figures are slightly lower. GE reported in June an increase of 10%-15% for its short-cycle business. However this decrease should not be a surprise given the lower level of activity in the summer months. August should be also lower than in June. We reiterate our hold recommendation. We believe GE stock price would remain volatile as long as the U.S. economy does not clearly recover. Furthermore, the distrust related to companies with complicated accounting system is still in the air. This does not mean that it would happen again, but investors remain cautious and fickle.

US Technology Sector

During the last week we got the confirmation of what had to be expected concerning the semiconductor capital equipment sector: The July book-to-bill ratio fell to 1.16, from 1.26 in June, as new orders fell by 18%. This slowdown in bookings is consistent with the cut in capital expenditure by the chip-maker and foundries, which were announced during the quarter reports, due to weak end- demand and cautious expectations for the next year. A ratio of 1.16 means, that the industry is expanding, but the pace is slowing down. Looking forward, industry trends should support growth in the sector. One important driver will be the 300mm wafer technology, as it will reduce the cost of manufacturing chips. It enables more chips on one wafer, compared to the current 200mm.