Barron's: AMAT, KLAC, others - overvalued. Investment advice from Sun Microsystems' CEO Scott McNealy
My comment: same old. Barron's liked AMAT a year ago at 46,
doesn't like it now with recovery at hand at only $6 more.
Gottfried
subscribers
online.wsj.com
excerpt
Chips Are Up
Even in a tough tech market, there generally is one
strong sector favored by momentum-oriented investors. The
current favorite: semiconductor capital equipment makers,
including Applied Materials and KLA Tencor. The group is up
nearly 30% this year, with Applied Materials, at 52.40, up
31% and KLA Tencor, at 65.63, up 32%. Both KLA and Applied
Materials have doubled from their September lows.
Still Sluggish: Despite Friday's 36-point gain, the Dow
Industrials finished the week down 132 to 10,271. All of
Friday's gain -- and more -- was due to a 7.81-point surge
in 3M.
The irony is that semiconductor-equipment makers are
expected to have posted their worst revenue declines in the
entire tech sector during the first quarter, but forward-
looking investors focus on orders, which bottomed in the
fourth quarter.
"The momentum guys don't give up. They drive up stocks, no
matter how stupid the story," says Fred Hickey, editor of
the High-Tech Strategist, a Nashua, N.H., newsletter.
Hickey calls the valuations of the equipment
stocks "insane" given the overall health of the tech sector
and the state of their customers, the semiconductor
industry. The bull case is that semiconductor companies
must spend heavily to upgrade their product lines
regardless of their own profitability. Among the only
semiconductor producers with ample current earnings is Intel.
Applied Materials was favorably profiled in Barron's a year
ago, when it traded at 46, but it may be time to take
profits in the industry leader. At 52, Applied commands
nearly 200 times projected earnings of 27 cents in its
current fiscal year ending in October and for 40 times
projected profit of $1.30 a share in the following fiscal
year.
The bull case is that Applied should trade for 30 times
annualized second-half 2003 profit of $2 a share, or $60 a
share. But why should a cyclical company like Applied
Materials trade for 30 times a very optimistic earnings
projection in 18 months? The company's peak profit was
$2.39 a share in 2000 -- a level that may not be reached
for years. With a market value of $43 billion, Applied
Materials trades for nearly 10 times estimated 2002 sales
and 1.7 times total industry spending on semiconductor
equipment.
Hickey points out that KLA Tencor recently touched 70 --
back where it traded at the height of the tech mania in
March 2000 -- despite a materially worse outlook now.
Hickey thinks KLA is ludicrously priced, trading for about
65 times projected profits in its current fiscal year ending in June and for about 10 times estimated 2002 sales.
Scanning the Sales
Most investors focus on earnings when valuing stocks, but
it's also important to pay attention to sales.
Stocks of companies valued at high multiples of their
annual revenues can prove dangerous because of the risk of
contracting profit margins in a competitive economy. In
recent comments to Business Week, Sun CEO Scott McNealy
warned investors about buying stocks of firms valued at 10
times sales or more. He noted that at its peak, Sun traded
at 64, or 10 times sales, a valuation that he now suggests
was "ridiculous." Sun now fetches a more modest two times
revenue, while companies like Nortel fetch about one times
sales.
Merrill Lynch recently compiled a list of 15 tech companies
trading for more than 10 times sales (see table). The list
includes such well-known companies as Microsoft, Yahoo,
Qualcomm, Veritas Software and semiconductor maker Maxim
Integrated Products.
Pricey Stocks
CEO Scott McNealy recently warned investors about buying
stocks in tech companies valued at more than 10 times their
annual sales. Here's a current list of such stocks. Buyer
beware.
Stock Market Value
Company Price To Sales
Silicon Labs $33.75 21.6
Linear Technology 42.27 18.8
Marvell Technology 40.65 16.0
Maxim Integrated Pdts 54.82 14.6
Yahoo 18.37 14.2
Semtech 35.30 12.7
Qlogic 49.15 12.7
Brocade Commun 27.17 12.7
Check Point Software 22.80 12.5
Xilinx 40.42 11.6
Microsoft 56.62 11.3
Emulex 30.45 10.9
Qualcomm 36.39 10.6
Advent Software 54.23 10.5
Veritas Software 35.07 10.4
Source: Merrill Lynch |
