Is now the time for equipment stocks?
Silicon Valley: The End Was Here!
By Marcy Burstiner
Staff Reporter
7/23/98 3:11 PM ET
SAN FRANCISCO -- Amid grumbling about the dismal chip market, continued
worries about Asia and typically mixed signals from Fed Chairman Alan
Greenspan comes NationsBanc Montgomery Securities analyst Brett Hodess
standing tall and decisive. Now is the time, says Hodess, to buy
semiconductor equipment stocks.
"Until now, we've been saying, 'Don't buy the stocks,'" said the senior
managing director for semiconductor capital equipment. "The stocks are
flat now, but they won't get much worse. They will be bottoming out
pretty soon."
On the heels of Hodess' Tuesday morning call, Applied Materials (AMAT
:Nasdaq) and Novellus Systems (NVLS:Nasdaq) rallied 4% in a weak market,
though they gave up some of those gains Wednesday. His other choice chip
equipment picks -- Lam Research (LRCX:Nasdaq), Teradyne (TER:NYSE) and
KLA-Tencor (KLAC:Nasdaq) -- rose an average of 3.1% Tuesday. (Of those
stocks, Hodess said his firm had not participated in underwriting for
Applied, KLA and Teradyne and has not underwritten Novellus in four
years.) The stocks were all down as of 3:00 p.m. EDT Thursday.
The broader prospects for the sector are tied to the fortunes of the big
chip makers, such as Intel (INTC:Nasdaq) and Micron Technology (MU
:Nasdaq), which were decimated this year by the Asian economic crash
that took millions of consumers out of the market for computers and
other integrated circuit-based devices. The loss of that market created
a huge oversupply in chips back home, and the chip makers reacted by
slashing their budgets for new equipment.
No one is predicting a reinvigorated Asian market just yet, but the
semiconductor equipment industry has seen its darkest days, Hodess said.
Still, no business upturn is expected until at least the second quarter
of next year. He estimates that spending by chip makers on equipment
will fall 19.3% this year, but then rise 4.9% in 1999.
But a sudden upswing in the stocks could come soon because impatient
semiconductor watchers are waiting for any sign of good news, he says.
Hodess, a onetime senior product engineer at Intel, is widely watched on
the Street and has made the Institutional Investor's All-American
Research Team three years running.
But not everyone is buying Hodess' call. At Merrill Lynch in San
Francisco, analyst Mark Fitzgerald sees no upward movement any time
soon. Fitzgerald reasoned that semiconductor equipment makers benefited
from IBM's (IBM:NYSE) news this week that its PC inventories were
shrinking and that PC sales should strengthen by the fourth quarter.
"But the outlook for the next six months is very bad for the capital
equipment sales," Fitzgerald said. "It's a seasonal blip, and we could
see new lows."
He said he hasn't changed his ratings for the industry sector, which
have been holds across the board.
To Hodess, the more stubborn bears like Fitzgerald are missing one
important sign of better times: Intel's recent recommitment to its
schedule for next-generation chips, which will require new equipment.
There was even good news in the bad news of Intel's cuts in capital
spending, Hodess added.
"Cutbacks in capital spending have been so sharp, so aggressive," he
said. "Before, everyone thought it would be a long, drawn-out process.
People didn't know how to size the problem. But you have to amputate the
arm to save the body. I'm looking at valuations of stocks currently and
looking at how much of the bad news seems to be built into these
valuations. It's likely that the valuations of these stocks are pretty
low."
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