For you FA dudes we have this from the Financial Post of Canada. Apparently, it was AMAT recognition day in Canada today.<gg> Jeff
<<FINANCIAL POST: APPLIED MATERIALS MAKES MOST OF CYCLE
96% match; Financial Post - Canada ; 15-Feb-2000 12:00:00 am ; 828 words
PALO ALTO, Calif. - Wall Street is expecting the shares of Applied Materials Inc. (AMAT/ NASDAQ) to continue rising in the next few months. But the risk of owning the stock is rising, too.
The shares have climbed 319% in the past 15 months. They closed trading yesterday at $161 1/16, down $3 15/16. (All figures are in U.S. dollars.)
The Santa Clara, Calif.-based company is a leader in the semiconductor equipment market. It is the beneficiary of a powerful cyclical recovery in that market. As the demand for chips barrels ahead, semiconductor makers must make up for several years of underinvesting by building new plants and production lines.
Applied Materials supplies the chip-making gear in greater quantities than do its competitors. The company's fourth-quarter revenue of $1.56-billion was almost twice the combined quarterly revenue of its two nearest competitors, Teradyne Inc. and KLA-Tencor Corp.
But few truths about the semiconductor market are more enduring than this one: Recoveries come in cycles that last about three years. After that, the addition of plants brings overcapacity and an oversupply of chips that sends prices and profits tumbling.
That means Applied Materials' stock, and that of other chip-equipment makers, is "clearly moving into the high-risk part of the cycle now from an investor's point of view," says Mark FitzGerald at Merrill Lynch & Co. The cyclical risk is heightened by the flood of "momentum" money in the stock. The fast-moving dollars slosh in as company growth rates rise and drain out as soon as growth begins to subside.
The present recovery in the semiconductor market follows a deep downturn, which was made worse by Asia's financial crisis. For equipment companies, the rebound has been quick and orders have risen faster than normal, says Jay Deahna, an analyst at Morgan Stanley Dean Witter.
In addition, chip-equipment suppliers in the United States have expanded their worldwide market share to 55% this year from 42% in 1994, estimates Mr. Deahna.
The upbeat industry fundamentals have pushed chip-equipment stocks up higher and faster than in past recoveries. At peaks of previous cycles, the stocks have traded at five to seven times their past year's sales, but they are now eight to 11 times sales, says Timothy Summers, an analyst at Advest.
Still, good news continues to come. Intel Corp., the biggest chipmaker, helped chip-equipment stocks in January by announcing its capital spending will rise to $5-billion this year, up from $3.4-billion in 1999. Analysts had expected about $4-billion.
Taiwan Semiconductor Manufacturing Co. added fuel to the rally by saying its own capital spending will rise to $3.73-billion this year, and another $963-million will be spent on joint ventures.
The industry is "in the early to mid-stages of the upturn," and Applied Materials is poised for some "profitable growth," said Joseph Bronson, chief financial officer at Applied Materials.
The company declined to discuss its outlook for its fiscal first quarter and the remainder of fiscal 2000, citing a "quiet period" prior to today's scheduled release of first-quarter results. But it hasn't changed its guidance to analysts of revenue of $1.6-billion to $1.65-billion, a gross margin of 50% and orders up 10% to 15% from the fourth quarter.
But analysts have big expectations for the quarter, and some believe the orders outlook, in particular, is outdated. Advest's Mr. Summers last month raised his forecast for the quarter to 21% sequential growth, or $2-billion.
Still, the realities of the cycle won't go away. Analysts expect semiconductor makers to break ground on new manufacturing plants this year, in contrast to 1999, when they mostly upgraded and expanded existing plants. The new chip-fabrication plants will come on line in late 2001 or 2002, bringing overcapacity, experts say.
Klaus Rinnen, an analyst at Dataquest, says chipmakers' worldwide capital spending in 1999, the first year of the up cycle, rose 13%. He expects it to climb 36% this year and 40% in 2001, when it will total about $64-billion. In 2002, capital spending should rise only 16%, to nearly $75-billion.
Mr. FitzGerald of Merrill Lynch, expects stronger capital spending this year. A January survey that gathered information from Intel, Motorola Inc., Texas Instruments Inc. and others suggests spending will increase more than 40% this year, and perhaps nearer to 50%. That could make 2000 the peak for this growth cycle, he says.
That possibility raises concerns about the price of Applied Materials' stock, because chip-equipment shares usually peak before the cycle does, often by as much as a year. "If this is a typical cycle, we're in the fourth inning," Mr. Summers says. "The stocks are probably already in the seventh inning."
Applied Materials should show strong business momentum in the next two quarters, says Morgan Stanley's Mr. Deahna. The company's fiscal fourth quarter, ending in October, could see some slowdown in the sequential growth rate of orders, he said. His target price for the stock is $165.
The company's size and product diversity might help it ride the cycle more easily than it has in the past, say some analysts. For instance, strong sales of equipment designed for larger, 300-millimetre silicon wafers that will be required by semiconductor makers in late 2000, could compensate for slowdowns in other product lines.
As well, personal computer sales no longer drive semiconductor demand. Cellular phones, modems and other consumer products are fast becoming major markets for chips.
Analysts and investors will scrutinize the market this year looking for any signs of change in supply and demand as companies add chip production. One variable they will focus on is the waiting period between the time chipmakers receive orders and deliver the goods.
Delivery periods might shrink first in the flash-memory market where chipmakers began adding capacity last year in response to shortages. Flash-memory is a flexible chip that stores data even when the product is turned off.
APPLIED MATERIALS INC.:
CEO: James Morgan
Ticker: AMAT
Listed: Nasdaq Stock Market
Head office: 3050 Bowers Ave., Santa Clara, Calif. 95054-3298
Telephone: (408) 727-5555
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