Computer Parts, Equipment Shares Are Rebounding: Taking Stock
Computer Parts, Equipment Shares Are Rebounding: Taking Stock
New York, Nov. 3 (Bloomberg) -- Money managers are jumping on a rally of shares in companies that make computer parts and the equipment to build them.
Stocks such as Novellus Systems Inc., which sells chipmaking equipment; Seagate Technology Inc., a maker of disk drives for personal computers; and Arrow Electronics Inc., a parts distributor, have soared as much as 81 percent since early October.
Analysts say the stocks have much more to gain, even though sales of their products hasn't yet recovered from recessions and weaker currencies in many Asian countries. ''Personal computer demand will strengthen, and we will see an increase in demand for components,'' said Crawford Del Prete, vice president of research at Framingham, Massachusetts, research firm International Data Corp.
While the improved outlook also has boosted shares of computer-makers such as International Business Machines Corp. and semiconductor companies including Intel Corp., stocks of parts and equipment companies are more volatile and offer the prospect of bigger trading gains.
These companies were among those that fell the hardest after collapsing economies and currencies in Asia started biting into U.S. profits. Novellus sank 55 percent from Oct. 10, 1997, through Oct. 8, 1998, while rival semiconductor equipment makers KLA-Tencor Corp. and Applied Materials Inc. plunged 72 percent and 50 percent respectively in about the same time.
Edgar Larsen, chief equity officer at Houston-based AIM Capital Management Inc. which oversees $110 billion, bought all three stocks during the last two months. He saw Novellus jump 76 percent, KLA-Tencor 69 percent and Applied Materials 47 percent What's more, all three are still at least 35 percent below their all-time highs.
New Transistor Standards
The industry's continuous push toward faster, smaller chips will require factories to buy new equipment, investors say. The move to a new 0.18 micron standard for transistor sizes means that most chipmakers will replace some equipment, said Sue Billat, an analyst with BancBoston Robertson Stephens in San Francisco. A micron is one-millionth of a meter, and the newest chips have about 30 million transistors. ''The leading-edge chipmakers will slowly buy equipment, even though business is weak in Japan and Asia,'' Billat said. She's particularly optimistic about Korea's Samsung Electronics, the world's largest maker of memory chips.
Bob Rodriguez, who manages $1.8 billion for First Pacific Advisors Inc. in Los Angeles, has been buying shares of components distributors such as Arrow Electronics, which declined 66 percent from March of this year through Oct. 5, and Marshall Industries, down 49 percent from July 1997 through Oct. 6. He's also buying the convertible bonds of manufacturing equipment company Lam Research Corp., whose stock nose-dived 87 percent from Aug. 20, 1997, through Oct. 8, 1998. 'Excessive Selling' ''There has been excessive selling of stocks that had any international electronic exposure,'' said Rodriguez, who has increased his holdings of Arrow by 80 percent. ''Though there will still be disappointing earnings over the next year, these stocks represent value at these levels.''
Arrow, the biggest electronic components distributor, is ''selling at throwaway prices,'' Rodriguez said, though it has almost doubled in the last four weeks.
Del Prete of International Data forecasts sales of disk drives, the permanent memories for computers, will increase in the final quarter.
His stock picks: Seagate Technology, the world's largest independent maker of computer disk drives, Maxtor Corp., Quantum Corp. and Western Digital Corp. Maxtor, which went public in July, touched an all-time high of 12 on Friday.
Some investors express concern that gains in shares of computer-parts suppliers may not be justified by the outlook for earnings. The book-to-bill ratio for North American semiconductor equipment makers, a closely watched gauge of the industry's health, was unchanged at 0.57 in September, as chip producers such as Motorola ordered fewer machines.
The widely watched ratio has been below 1.00 since November last year. A ratio below 1.00 usually indicates a contracting market as shipments exceed new bookings.
Pessimism
Morgan Stanley Dean Witter & Co. analyst Jay Deahna cut his ratings on equipment makers ASM Lithography Holding NV, DuPont Photomasks Inc., KLA-Tencor, Lam Research and Silicon Valley Group Inc. to ''neutral'' from ''outperform'' after recent price gains, saying there is no reason to raise earnings estimates.
Just this week, Syquest Technology Inc., which makes devices for storing information quickly from personal computers, suspended operations and said it was considering filing for protection from creditors under Chapter 11 bankruptcy laws. Trading in its shares was halted at 11/32; the stock traded as high as 19 5/8 in August 1995.
And there's the potential for more bad news from Asia or other emerging markets. ''There are never-ending negative surprises for the world financial scene,'' said Roger McNamee, a partner at Integral Capital Partners in Menlo Park, California, which owns technology stocks among the $600 million in investsments it oversees.
Still, people like AIM's Larsen are confident their investments will continue to rise. ''These stocks always recover long before orders come in,'' he said.
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