The last line is my fav.....
Mar 02, 1999
Semiconductors:Intel's Weakness Drags Down Shares of Chip Equipment Stocks
Director of Online Research: Dave Sterman
Just two weeks ago, chip equipment stocks rallied on news that the long-moribund sector may finally head upward. Shares of industry leader Applied Materials (NASDAQ:AMAT - news) soared to $68 on news that the company would post earnings for the January quarter that were twice expected levels. Most impressively, orders for new equipment surged 50% sequentially to $1.029 billion.
Orders placed by Japanese and European customers nearly doubled from October levels. On a call with analysts, management predicted that orders would rise yet again in the current quarter on a sequential basis.
Though the shares traded for just $22 three months ago, Morgan Stanley's Jay Deahna predicted that AMAT would soon hit $86. DLJ's Robert Maire figures the stock would top $90 later this year. Following suit, virtually every other analyst that follows the company boosted ratings and estimates aggressively. Of the 26 analysts that follow the firm, 22 now rate the stock a 'Buy' or a 'Strong Buy.'
The industry's second leading player, Lam Research (NASDAQ:LRCX - news) has also witnessed a breathtaking rebound in its stock price. Lam's stock surged from $9 to $38 in just ten weeks before a recent retreat.
Now, just two weeks later, shares of AMAT and Lam have slid more than 20%. Blame it on Intel (NASDAQ:INTC - news) and Compaq Computer (NYSE:CPQ - news) . Analysts that follow those firms are hinting of a massive slowdown in PC sales. Which begs the question: Does slowing demand for computers put the kibosh on the nascent upturn for chip equipment firms? 'If there's a slowdown in PC unit sales growth, it means any recovery in chip equipment stocks will be slower than expected,' says Prudential's John Pitzer.
Looking past this week's sentiments though, a strong case can still be made for chip equipment stocks. Several analysts cite a strong December quarter as the basis for ratings upgrades at Lam Research. 'Bookings in the quarter were 10% above the high end of our expectations,' wrote S.G. Cowen's Min Pang in a recent note.
What's more, 'following a painful restructuring, including a 37% reduction in force over the past two quarters and extensive cost cuts, it is a much leaner company,' Pang added.
As for those weakening PC sales, investors may be too hasty in their retreat. 'February is typically a slower month for personal computer unit growth,' says BT Alex. Brown's Erika Klauer. She adds that Applied Materials' January quarterly sales of $742 million were well ahead of her $635 million estimate.
Lastly, the book-to-bill ratio for all chips sold in North America rose 9% sequentially, marking the first gain in 15 months. Even if the woes in the PC segment worsen, demand for chips for all other kinds of devices, from cell phones to automotive electronics, is expected to surge throughout the year.
Bottom Line:
A PC-related sell-off in chip stocks has created bargains in the shares of chip-equipment stocks.
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