Chip stocks seen as perfect stocking stuffers
By Barbara Etzel
NEW YORK, Dec 21 (Reuters) - Christmas has arrived early for those who own semiconductor-related stocks as many share prices have soared this month to 52-week highs on stronger sales and expectations of a still better year ahead.
The Philadelphia Semiconductor Index, which tracks the share performance of 16 major semiconductor makers and computer-chip equipment suppliers, has risen 20 percent in the last week alone. It climbed nearly 5 percent to 698.78 Tuesday afternoon, up 250 percent from its trough a year ago.
Despite nearly across-the-board gains seen in the sector in the past several months, analysts said good values still could be found among some of the lower-profile stocks in the group.
''In the semiconductor area, these companies seem to take turns doing well,'' said Lawrence Borgman, an analyst at Josephthal & Co. Inc.
''Business is good. It is as simple as that,'' said David Wu, an analyst at ABN AMRO Inc. ''It looks like it is going to get better next year,'' he added.
The Silicon Valley-based Semiconductor Industry Association, the industry's trade group, has forecast worldwide semiconductor sales to grow 21 percent next year, paced by surging demand for chips for communications and Internet networks. The forecast growth would compare with an expected 15 percent sales gain this year and a sharp decline in 1998.
A trend toward stronger sales should continue for another two to three years, analysts said, before the industry's tendency to overbuild production capacity asserts itself, leading to a repeat of the historic boom-and-bust pattern among chip makers.
Semiconductor stocks have once again found favor with momentum investors this week after Novellus Systems Inc. (NasdaqNM:NVLS - news), a leading supplier of chip-making equipment, signaled that its business was booming late last week.
The bullish comments by Novellus were taken by many analysts as an indicator of strong demand for new capacity among major chip makers, sparking this week's recent gains.
Analysts say there are many other nuggets to be discovered under famous names like computer microprocessor king Intel Corp. (NasdaqNM:INTC - news), communications chip maker Texas Instruments Inc. (NYSE:TXN - news), and major equipment makers like Novellus.
Etec Systems Inc. (NasdaqNM:ETEC - news), which supplies pattern-making equipment to print circuits on silicon, and Cymer Inc. (NasdaqNM:CYMI - news), a maker of lasers used in the printing process, aren't as visible, but have equally good potential, Wu said.
Hayward, Calif.-based Etec, which has posted losses for its last two quarters, is expected to turn a profit of 8 cents for its quarter ending in January, according to a survey of financial analysts by First Call/Thomson Financial.
Wu said that while the company still has a way to go before it reaches full recovery, he believes the stock could trade at 60 within 12 months.
San Diego-based Cymer reported rising sales and net income in the third quarter ended in September, ending a string of quarterly losses and is expected to generate $1.32 per share in earnings for 2000 against a profit of 21 cents this year.
PaineWebber analyst John Lazlo sees value in Micron Technology Inc. (NYSE:MU - news), the top U.S. maker of computer memory chips. Lazlo sees the company's shares trading as high as $160 with 12 to 18 months, compared with its current $78.
''There could be a severe shortage of DRAM next year,'' Lazlo said, referring to dynamic random access memory, Micron Technology's core product line and the most popular type of computer memory chip. Such shortages will not be apparent for several months, he added.
While memory product prices have been erratic, they have firmed in recent months ahead of the holiday season. A wave of new computer purchases is also expected among corporate buyers next year as they upgrade to Microsoft Corp.'s (NasdaqNM:MSFT - news) new Windows 2000 operating system, due out in February, which analysts say requires a 64 megabytes of DRAM at a minimum.
Altera Corp. (NasdaqNM:ALTR - news), a maker of programmable logic chips that are used to create a range of custom electronic devices, is undervalued relative to rival Xilinx Inc. (NasdaqNM:XLNX - news), Lazlo said. Wu recommended it as a stock to own and still be able to sleep at night, in contrast to Micron Technology, which he said was a commodity business with prices that tend to move frequently.
Another way to play the semiconductor market is to look to the industry's supplier of equipment and tools, where Applied Materials Inc. (NasdaqNM:AMAT - news), the dominant maker of chip manufacturing equipment tends to garner most of the attention.
Kulicke & Soffa Industries Inc. (NasdaqNM:KLIC - news), the world's largest supplier of equipment used to assemble semiconductor components, could beat current earnings expectations, Josephthal's Borgman said.
That view is supported by brokerage Morgan Stanley Dean Witter, which issued a report Monday saying the company's bookings were ahead of schedule, which could boost earnings for both its December and March quarters.
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