I guess this is a cycle high call
It appears you are right. Note Needham's criticism of Solly's thesis toward the end.
snip---
Salomon Sees Upside for Pricey Chip-Equipment Stocks
By Rebecca Byrne
Staff Reporter
03/25/2002 03:04 PM EST
Salomon Smith Barney analyst Glen Yeung is betting that the next cycle in the chip-equipment business will be as strong as any that have come before it.
And it's that belief that prompted him to raise price targets on six chip-equipment stocks Monday despite some already sky-high valuations within the group.
"We continue to believe that significant appreciation remains as the expected-to-be-typical up-cycle progresses," Yeung wrote in a research note.
The chip-equipment group is currently trading at 25 times normalized earnings but has historically traded at a peak of 44 times normalized earnings, implying an average of 78% increase from current levels, he said.
Going Higher?
Yeung raised his price targets on Applied Materials (AMAT:Nasdaq - news - commentary - research - analysis), KLA-Tencor (KLAC:Nasdaq - news - commentary - research - analysis), Lam Research (LRCX:Nasdaq - news - commentary - research - analysis), Novellus (NVLS:Nasdaq - news - commentary - research - analysis), Teradyne (TER:NYSE - news - commentary - research - analysis) and Mykrolis (MYK:NYSE - news - commentary - research - analysis)
"Despite dramatic moves in stock prices over the past few weeks (pushing traditional valuation limits), we nonetheless believe that significant appreciation from current levels is achievable over the course of the up-cycle," he said.
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In prior cycles, chip-equipment stocks soared 248% in the 12 months following the point of minimum orders, according to UBS Warburg. In this cycle, orders bottomed out around the end of last year, implying stocks could be in for an impressive rally.
"These stocks tend to be valuation-immune at the start of an up-cycle," noted Christina Osmena, an analyst at Needham.
Reverting to the Median
Still, it's worth noting that semiconductor-equipment stocks are roughly twice as expensive now as they were at the same point in previous cycles. Applied Materials, for example, currently trades at 39 times 2003 estimates, while Teradyne trades at 122 times '03 estimates and Lam Research trades at 96 times '03 estimates. The median price-to-earnings ratio of chip-equipment stocks two years out stands at about 34 while the mean is higher at 56, according to Warburg.
In addition, some analysts are questioning just how typical this cycle will be and how achievable some of the lofty revenue and earnings projections really are.
Salomon's "thesis seems to be based on typical growth cycle to cycle, on equipment revenues doubling," said Osmena. "But I don't see the drivers that existed in past cycles."
Growth in the chip-equipment space was driven by the emerging PC industry in the 1980s and then by the growth of the Internet and cell-phone market in the 1990s. "But at least for now, we have nothing" like that, Osmena said.
"We should see strong growth from the consumer electronics market, but it's not enough," she added.
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