Novellus outlook draws chip skeptics
By Reuters
August 31, 2001, 3:45 p.m. PT
LOS ANGELES--The prolonged capital spending slump in the semiconductor equipment sector was highlighted by Thursday's cautious outlook from Novellus Systems, analysts said Friday.
Several analysts said they did not expect a sustained recovery in demand for semiconductor manufacturing gear until the first half of 2002 at the earliest, raising the risk of further downside for the shares of companies in the sector, already battered by four straight months of declines.
Shares in Novellus closed regular trading Friday down $2.42, or 5.2 percent, at $44.31, taking losses for the week to near 12 percent and pushing the stock to its lowest level in six weeks.
On Thursday, Novellus said in a mid-quarter conference call that it expected bookings for the current quarter to be around $160 million--at the low end of the projections it provided in July.
At the same time, the San Jose, Calif.-based company stuck to its full-year target for bookings of $800 million, saying it expects a better fourth quarter.
A company spokeswoman said that was an "aggressive" forecast. Many analysts expressed doubt that the year-end quarter would show the kind of rebound in investment in new equipment by semiconductor manufacturing companies that Novellus' forecast implied.
"We do not believe technology orders alone will drive the 27 (percent sequential) growth needed to reach this target, and in fact orders could be down sequentially," said Credit Suisse First Boston analyst Jon Pitzer.
Banc of America Security's Mark FitzGerald called Novellus' projection a "stretch" and predicted a bookings range of $760 million to $800 million for the full year.
Novellus held its prediction of $215 million in shipments and maintained its third-quarter revenue estimate of $300 million and earnings of 24 cents per share.
Despite that steady earnings guidance, most analysts were cautious about the sector's prospects.
CSFB's Pitzer said in a note that semiconductor equipment makers would underperform the broader market in the best-case scenario and that there was a "significant downside risk of greater than 25 (percent) from current levels, as investors confront the depth and duration of the current downturn."
A further 25 percent drop in the Standard & Poor's Semiconductor Equipment index, which includes Novellus as one of its four components, would take the benchmark to its lowest level since June 1999.
"We do not see the improvement in orders at the end of calendar 2001 as the beginning of a capital equipment market upturn, which we expect later--by the end of the first half of calendar 2002," ABN AMRO analyst Nikolay Tishchenko said in a note on Friday.
Bear Stearns analyst Robert Maire was also hesitant about predicting a rebound for Novellus, which has been one of the better performing stocks in the sector, in the short term.
Even after Friday's losses, shares in Novellus have gained almost 24 percent since the start of the year, outperforming the S&P sector index, which is up almost 15 percent over that period.
"It is quite clear that the timing of the upturn is unclear," he said. "Visibility remains low and orders continue to drift down. We could be in this mode for another month or another year, it is quite difficult to tell."
At the same time, though, Maire said that Novellus stock "should deserve a premium" over other semiconductor equipment firms because of what he called the stock's "superior performance."
In contrast, analyst Glen Yeung of Salomon Smith Barney said that Novellus's caution was not likely to be reflected by competitors like Applied Materials and KLA-Tencor--also components in the S&P sector index.
"We do not expect similar reductions from (Applied Materials) or (KLA-Tencor), who have a larger proportion of 'technology based' orders; expect less negative commentary from (Novellus') peers," he said.
Bear Stearns, Merrill Lynch, Banc of America Securities and CSFB were among the major brokerages cutting earnings estimates for Novellus on Friday. Robertson Stephens, though, downgraded the shares to "buy" from "strong buy."
Bear Stearns lowered its fiscal 2002 estimates on the company to $1.43 from $1.50. Merrill Lynch cut its 2002 estimates to $1.20 from $1.45. Banc of America cut its 2002 forecast to 92 cents from $1.21. CSFB made the sharpest cut, lowering its 2002 earnings projection to 26 cents from $1.25.
The consensus estimate of 23 analysts surveyed by First Call is for earnings of 24 cents per share, with a range of 21 cents to 25 cents. The First Call consensus of 11 brokers was for revenue of $309.6 million.
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