Analyst comments on semis. Will be interesting to see who is right a few months from now. Kurlak still bearish on Intel after they made him look like an ASS last Q.
The Ax: Ax Notebook: The Semiconductor Industry Gets Off the
Canvas
By Eric Moskowitz and Medora Lee
Staff Reporters
Analysts covering semiconductor-equipment makers have had a humbling 12 months or so.
Starting a few months after last fall's Asian-tinged retreat in the industry, these analysts have
called for industry comebacks just about every month even as stock prices continued to head
south.
Now the analysts are aiming more modestly to predict a bottom.
Exactly a year and a day after the Asian contagion hit Wall Street, there seems to be a consensus that the
semiconductor-equipment makers' problems -- led by excessive capacity cutting into capital spending -- are nearing an end.
"The first inflection point, the end to a deterioration in business, is evident on average throughout the industry," wrote Credit
Suisse First Boston's Elliott Rogers to clients this week. The second inflection point, signifying an actual upturn, he said, could
come as soon as 1999's first quarter. Rogers, who is a newly minted 1998 Institutional Investor all-star, made a prescient
warning in early July not to re-enter semiconductor-equipment stocks.
Morgan Stanley's Jay Deahna, another 1998 all-star, points out that September's semiconductor-equipment book-to-bill ratio
was 0.57, flat with a revised number from August. "We believe a bottom is forming in book-to-bill ratios," says Deahna. A ratio
above 1 is a good sign for semiconductor-equipment stocks; a ratio below 1 indicates that supply is still ahead of demand. For
example, in September 1997, the book-to-bill ratio, denoting the value of orders for each dollar of equipment shipped, was
1.05, according to the Semiconductor Equipment and Materials International.
Investors already are counting on better performance. The Philadelphia Stock Exchange's semiconductor index is up 32%
since Oct. 8, when the index hit a 52-week low. Semiconductor companies, led by Intel (Nasdaq:INTC - news) , are also
showing signs of life.
The Santa Clara, Calif.-based bellwether reported third-quarter earnings of 89 cents per share, 9 cents above the consensus
estimate, a boost to bullish Intel analysts such as Morgan Stanley's Mark Edelstone and Piper Jaffray's Ashok Kumar.
"We've absolutely seen a big turn in the industry after the second quarter," says Edelstone, who says the second quarter was a
bottom for semiconductor stocks. He adds that the turn came "when we had a peak number of negative preannouncements and
the highest negative momentum in terms of revenues." Edelstone, along with Kumar, rates Intel a strong buy. (Piper Jaffray
hasn't participated in any of Intel's offerings. Morgan Stanley has participated in an underwriting of Intel put options in the last
three years.)
Merrill Lynch's Tom Kurlak -- who is slowly turning into a grizzly -- isn't giving up the fight, however. After Intel reported, he
told clients: "We estimate that orders are flattening recently, implying a peaking of new order level entering the fourth quarter."
He predicts Intel will earn 90 cents per share in its December quarter, 8 cents below last year's figure and 4 cents below the
early line.
Edelstone sees Intel earning 99 cents a share in its fourth quarter, but "I think there is an upside to that number." Bears are
worried that Intel will continue to lower PC chip prices to stay competitive with Advanced Micro Devices (NYSE:AMD -
news) , which will hurt earnings going forward. Edelstone argues, however, that inventories are low, and demand is on the
upswing, a factor that should outweigh declining PC chip margins. If Intel reports a strong fourth quarter, this will be good news
for semiconductor-equipment stocks.
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