SmartMoney.com - Stock Watch Follow the Money
By Monica Rivituso
biz.yahoo.com
AS THE WORLD'S No. 1 chip maker, Intel (NASDAQ:INTC - news) sure does sell a lot of stuff. Among other things, it supplies microprocessors to PC manufacturers, flash memory to cell-phone makers and network processors to networking-equipment companies. But for all the products it sells, Intel is a ravenous buyer of goods as well. When a company as big as Intel goes shopping, it goes shopping.
No other chip maker comes close to matching the billions that Intel spends each year. Last year, the company spent $7.3 billion on new equipment and manufacturing facility upgrades. That amounted to 19.3% of the industry's total $37.91 billion in capital spending. The No. 2 capital spender in 2001, Taiwan Semiconductor Manufacturing (NYSE:TSM - news), didn't even put out one-third of what Intel did. ``You start to get into rarified air when you're spending as much as $7 billion,'' says Brian Matas, vice president of market research at IC Insights.
But even giants like Intel can breathe the air up there for only so long. In its fourth-quarter report Tuesday, Intel announced it was cutting its 2002 capital-spending budget 24.7%, to $5.5 billion. For analysts and investors expecting Intel to trim its budget by 15% or so, the news was a surprise. It's no wonder chip-equipment stocks staged a sharp sell-off. By the end of trading Wednesday, bellwether Applied Materials (NASDAQ:AMAT - news) was sitting 9% lower at $41.55, while Novellus Systems (NASDAQ:NVLS - news), Rudolph Technologies (NASDAQ:RTEC - news) and KLA-Tencor (NASDAQ:KLAC - news) fell 8.3%, 11.5% and 9.6%, respectively.
For chip-equipment makers, this was yet more bad news. The industry is coming off its worst year ever: World-wide chip-equipment sales fell 38% to $29.6 billion in 2001. And this year, sales are expected to fall 3% further to $28.7 billion. True, things will eventually get better: Sales should increase 29% to $37 billion in 2003 and 23% to nearly $46 billion in 2004, according to Semiconductor Equipment and Material International, an industry trade group. But investors may have been hoping for a speedier recovery — at least judging from the way they've bid up chip-equipment names in recent months. For example, even with this week's sell-off, Applied Materials is up 51% in roughly three month's time, giving it a price-to-earnings ratio of 186 and a price-to-earnings-growth, or PEG, ratio of 8.4. (Compare that to the Standard & Poor's 500 P/E of 22.7 and PEG of 2.2.)
So what's an investor looking to play this sector to do? Follow in the wake of the giant. Despite its diminished budget, Intel will still account for about 18.7% of the industry's capital spending, according to IC Insights' forecast. A handful of key companies will probably benefit from a new capital-spending focus at Intel, analysts figure. But be forewarned: Some of these stocks are pretty rich, so waiting for a pullback is advised.
Last year, Intel focused on shrinking the size of its chips. This year, the big push will be to invest in machinery to make chips on 300-millimeter silicon wafers instead of the smaller 200-millimenter wafers widely used today. Since more chips can be cut from a single 300-millimeter wafer, production is more efficient and the product can be sold more cheaply. But this gear comes at a substantial cost: A company can spend $20 million to $25 million on a single piece of chip-making equipment, while a small room outfitted with these machines can run $100 million to $200 million, explains IC Insights' Matas. And with 300-millimeter equipment comes the move to using copper wires instead of traditional aluminum interconnects in chips — a process requiring special equipment as well.
One beneficiary of Intel's spending will likely be Applied Materials. Not only is it the leader in 300-millimeter manufacturing equipment, but it's a traditional winner of Intel contracts. But as pricey as the stock is right now, Michael O'Brien, a Wall Street Journal All-Star analyst from SoundView Technology, recommends waiting for a 20% decline before taking a position.
Two other companies also have good exposure to the copper-wiring aspect of production: Novellus Systems and Rudolph Technologies. Novellus is up there with some of the pricier stocks in the group, with a P/E of 252 and a PEG of 11.2, while Rudolph Technologies carries a more reasonable multiple of 73 and a PEG of 3.3. O'Brien says he would be a buyer of Rudolph at these levels.
And as with any chip-making process, tools are necessary to test all those complex integrated circuits. KLA-Tencor, analysts say, has a good portfolio of test equipment for this generation of new technology (especially copper circuitry) and is an important supplier of Intel. With a P/E of 48 and PEG of two, it's one of the more reasonably valued names in the sector.
For investors who are put off by the price tags attached to many of these stocks, a more opportune buying time might be on the way. Some analysts, such as Gerald Fleming, a Wall Street Journal All-Star analyst at Fahnestock & Co. (formerly of Tucker Anthony), consider the earnings estimates on Wall Street to be too optimistic for the industry's pace of recovery. In upcoming weeks as chip-equipment makers report quarterly results, most will make their numbers, says Fleming. But he adds that guidance for future business will probably indicate that new orders for these companies remain sluggish. And this, he predicts, will prompt many analysts to lower their earnings forecasts.
If that happens and a sell-off in these stocks ensues, investors might be able to shop where analysts say Intel will also be doing its own shopping this year.
Personally I have no experience at all with Excell so I can't help you at all on your quest to get A added to the tables.
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