ANALYST WATCH: Chip-equipment debate rages on
By Larry Barrett, ZDII May 4, 2001 6:20pm
After spending the past two months offering divergent opinions on
the investment value of chip-equipment stocks in a lousy market,
analysts are placing even more emphasis on Applied Material's
second-quarter results and outlook.
Applied Materials (Nasdaq: AMAT), the world's largest vendor of
semiconductor equipment, already slashed its outlook for the quarter,
driving the consensus estimate down to a profit of 33 cents a share
on sales of $1.95 billion.
Before Applied Materials revised its outlook, analysts were forecasting
a profit of 49 cents a share on sales of $2.4 billion. It will report its
second-quarter numbers May 15.
While all the analysts following the chip-equipment sector agree that
capital spending by chipmakers will bottom out in the next two
quarters, there are divergent opinions about whether or not these
stocks are good investments at this point.
Timing and luck are everything in this corner of the
technology-investing universe. The challenge for investors is picking
the best time to buy Applied Materials, Lam Research (Nasdaq:
LRCX) or Novellus Systems (Nasdaq: NVLS), stocks that are sure to
regain their luster once the manufacturing boom returns.
On Tuesday, Wells Fargo Van Kasper analyst Susan Crossley
upgraded Applied Materials from a "market perform" rating to a "buy"
and raised her 12-month price target from $50 to $72 a share.
"The decline in microprocessor orders should begin to decelerate as
early as June when capital utilization at chip fabs should reach a
trough," she wrote in a research note. "There are also indications that
Samsung, Applied's second-largest equipment customer, is about to
resume placing orders after a four-month hiatus."
Two days after Crossley's upgrade, Tucker Anthony Sutro analyst
Gerald Fleming downgraded Applied Materials, Lam Research and
Novellus from "market perform" ratings to "underperform."
That same day, Novellus Chief Executive Officer Richard Hill told
analysts attending the Merrill Lynch Hardware Technology
Conference that semiconductor plants worldwide are only working at
between 30 percent and 80 percent of full capacity.
"I don't expect to see any uptick in bookings until the fourth quarter,"
he told Reuters. "It would probably take one to two quarters before
you would then see our earnings start to head in the northerly
direction."
Despite all the negative news, semiconductor-equipment stocks have
made sharp gains in recent weeks, increasing between 15 percent
and 25 percent each.
Much of that run-up can be attributed to Intel (Nasdaq: INTC), the
world's largest chipmaker, which reaffirmed its plans to spend $7.5
billion on capital equipment this year as it gears up for the inevitable
recovery in the later part of this year.
However, Fleming points out that Intel has already ordered another
32 percent of its planned 2001 expenditures for delivery in the
second quarter, suggesting that second-half spending will come to a
screeching halt.
Texas Instruments (NYSE: TXN), the leading vendor of digital signal
processors, cut its 2001 capital spending to $1.8 billion, with half of
that already spent in the first quarter.
"Together with Motorola, which last week announced plans to cut
spending to $750 million from $2.4 billion last year, these
announcements appear to mean that the three largest domestic
equipment buyers will probably reduce spending by 50 percent to 80
percent in the second half of 2001," Fleming wrote in a research
report.
Michael O'Brien, an analyst at Wit SoundView, said that some
analysts are playing a dangerous game by advising clients to get into
chip and chip-equipment stocks now, assuming that their prices won't
drop much more before business conditions improve.
"We are not fans of chasing these stocks, although the fundamentals
in the electronics end-markets are beginning to look less negative,"
he said last month. "From our viewpoint, the rebound in capital
spending for capacity purchases is still several quarters away."
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