From Barrons:
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Twice in recent months, we've relayed bearish musings on the semiconductor equipment sector from Jim Covello, who tracks the sector for Goldman Sachs. Last week, though, Covello switched sides. He now advises over-weighting the group. Covello says he's suddenly seeing evidence of a pick-up in orders, first from TSMC and UMC, the Taiwanese contract chip makers, and then from the memory sector, where prices have firmed. He now says equipment companies will experience 10%-15% sequential improvement in orders in the first two quarters of 2002. And, Covello adds, improving orders have historically meant rising stock prices.
Covello raised his rating on a host of equipment stocks, designating Applied Materials as his single best idea. On Tuesday, Applied will report earnings for its fiscal first quarter ended January. Covello expects Applied to break even. The key number will be orders. Applied previous forecast $1 billion in orders for the quarter. Covello thinks the number could come in higher, and figures orders in the following quarter will be 10%-15% higher.
Covello concedes that the stocks are no raging bargains -- the consensus view on Applied's October 2002 fiscal year is 21 cents a share, with $1.34 forecast for 2003. To justify a higher price requires using a multiple of "peak earnings." Covello figures Applied can reach $3.30 a share in the next cycle. He thinks Applied can rise from 40 to 65, but warns that in past cycles, most of the move has come early. Miss the start of the rally, he says, and you could miss the whole thing. Covello does say that the stocks are too high to generate the triple-digit returns the sector has provided in past cycles. And he warns that there is some risk that the current move is a head fake, and orders will recede again in the second half. Nonetheless, Covello's a convert. Now, he believes. |
