SMARTMONEY ONLINE: Woe Be The Chip Equipment Sector
By JOSHUA ALBERTSON
Dow Jones Newswires
SmartMoney Interactive
NEW YORK (Dow Jones)--For semiconductor equipment companies, the best thing about this week is that it's over.
Analysts are downgrading their estimates for the sector almost as rapidly as the offending companies can join the preannouncement parade.
SmartMoney's semiconductor equipment picks have not escaped the carnage.
Applied Materials (AMAT) shed 3.2% this week, ASM Lithography (ASMLF) lost 17.4%, Credence Systems (CMOS) dropped 7.6%, Novellus (NVLS) dipped 12.9%, and Silicon Valley Group (SVGI) gave back 9.9%.
Analyst Jay Deahna of Morgan Stanley Dean Witter has been leading Wall Street's charge to reevaluate the beleaguered group. Thursday he cut his semiconductor capital spending forecast for 1998 and Friday he downgraded AMAT, ASMLF, and KLA-Tenor (KLAC), from strong buys to outperforms. Deahna had been expecting a 12% to 14% decline in spending this year. Now, he's lowered his outlook to a 20% to 22% decline.
"We indicated that we would be trimming our earnings estimates across the board so all of our models would be in line with our [capital spending estimate cuts]," he says. "We just decided to get the Strong Buys out of the way." What's the problem? Deahna blames unexpectedly weak demand for chips and sharp drops in factory utilization during the second quarter.
PC demand isn't bad, but inventories have yet to clear sufficiently to ramp up new production, he says. PC motherboard production fell substantially in May and early June in front of microprocessor price cuts from Intel (INTC) and the introduction of Microsoft's (MSFT) Windows 98 operating system.
Deahna had expected a turnaround in chip equipment demand by now. But, he says, "the factory utilization rates got awfully low, creating a 10th and 11th inning for capital spending cutbacks. And [the cutbacks] are pretty harsh. They're going to affect everybody." The Institutional Investor-ranked analyst anticipates choppy times ahead before these pallid performers get their color back. "The stocks should stabilize after earnings season, but between here and there it's going to be a pretty dicey market," he says.
Still, Deahna sees light at the end of the tunnel. He says he can envision a scenario whereby the equipment companies regain some positive momentum as early as the middle of the summer. "It's possible," he says, "that once we get through the early part of the [preannouncement] season, the shorts might start to cover." The value players, he adds, might jump in once the stocks have absorbed all of the bad earnings news. And finally, growth investors could see opportunities in the fall if semiconductor sales turn around.
But, then again, these equipment makers don't operate in a vacuum. Deahna warns that weak demand in the PC market, continued semiconductor oversupply, an economic slowdown in the U.S., and "predatory pricing by Japanese equipment suppliers" could all contribute to a slower-than-expected recovery.
In other words, enjoy the weekend, there's more turbulence ahead.
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