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Politics : Formerly About Applied Materials -- Ignore unavailable to you. Want to Upgrade?

To: Proud_Infidel who wrote (44713)	3/29/2001 3:34:16 PM
From: advocatedevil	Read Replies (1) \| Respond to of 70976

"The Chip-Equipment Sector Hasn't Bottomed Yet" Thursday March 29, 1:00 pm Eastern Time Morningstar.com biz.yahoo.com With almost every chipmaker having already warned of poor earnings this quarter (sometimes twice), it's not a stretch to say the sector's near-term outlook has turned very, very ugly. Chip-equipment stocks, meanwhile, have been surprisingly resilient during this Nasdaq sell-off. Chip-equipment shares have edged up 6% over the past three months, while chip stocks have fallen by another 10% and the Nasdaq by 25% over the same period. But based on capital-spending budgets in the chip sector, we think this relative strength will prove fleeting. How Bad Will 2001 Be? As the world's largest chip-equipment maker, Applied Materials (Nasdaq: AMAT - news) commands investors' attention. During its earnings call in February, the industry's ``big dog'' offered its perspective as to how grave annual industry sales would turn out. At that time, Applied's chief executive, James Morgan, was very hesitant to provide industry sales projections given the uncertainty in the chip market. Eventually he said that equipment sales would decrease 10% in 2001. Chances are, Jim, the year will be much worse. Survey Says: Worse Than Investors Think We think capital spending in 2001 will be like night and day when compared with last year's industry growth of more than 60%. Many of the top spenders in 2000 plan to reduce their budgets considerably in 2001. Based on current budgets, the top 10 spenders will decrease capital spending by roughly 15%. The next 10 equipment spenders should make similar reductions, even though this second tier includes Micron Technology (NYSE: MU - news) and Advanced Micro Devices (NYSE: AMD - news)--both of which still have plans to increase their capital expenditure in 2001. And since the top 20 spenders usually account for between 70% and 80% of chip-equipment spending, it's fair to assume this group is a good proxy for the whole industry. That outlook may be dim, but it may get even worse. The chip industry's two biggest rollers in 2000, Intel (Nasdaq: INTC - news) and Samsung, likely will reduce their spending forecasts going forward. Intel insists now that it will increase its mammoth capital-spending budget to $7.5 billion, despite an anemic PC market. And Samsung's preliminary budget still stands at $5 billion. With Intel's and Samsung's current capital-expenditure numbers buttressing an already poor forecast, we find it very unlikely these giants will bail out the equipment industry. Damage Control We believe that Intel will revise its spending forecast once it realizes a massive PC recovery isn't around the corner, probably during the second half of this year. Also, Samsung--the world's largest memory chip producer--has already stated it has a contingency capital-spending plan in place if chip prices remain in the gutter. In our opinion, it's highly likely that Samsung will go with Plan B. Keep in mind, any cuts from these two giants, which combined for a fifth of spending in 2000, will have a huge negative impact on the equipment sector. So the question isn't whether or not Intel and Samsung will cut their capital spending, but rather by how much. If there's any tiny consolation to the equipment industry: It's unlikely that either company will make drastic cuts (50%+). Intel, for example, must still spend heavily to decrease the cost of its Pentium 4 processor to keep pace with AMD, while Samsung has historically spent aggressively during prior downturns to gain market share on weaker rivals. Assuming, then, both chipmakers end up slashing their existing budgets by about 20%, in addition to several stragglers in the second tier yet to cut, and chip-equipment sales could easily atrophy by at least 20% to 25% in 2001. The Price Is Not Right With many pundits and Wall Street analysts expecting more budget cuts, it's perplexing to us why chip-equipment stocks have held up so well in 2001. Investors, for example, saw an equally poor performance from the sector in 1998 when sales fell by 26%. That year, chip- equipment stocks fell by 13% on average. Given that historical evidence, we think chip-equipment stocks may be headed for a fall. Compared with previous downturns, the stocks remain pricey. Let's look at Applied Materials: With a market cap equaling the stock value of all of its U.S.-traded peers combined, Applied trades at roughly four times sales. This isn't exactly spitting distance from its prior low point of 1.9 in 1998 or even its high point of 1.8 in 1992 (another down year for the sector). Unfortunately, the valuations of other leaders in the sector tell a similar story, like Novellus Systems (Nasdaq: NVLS - news) and KLA-Tencor (Nasdaq: KLAC - news). Should investors sell their chip-equipment stocks? That depends on one's own time horizon and investment goals. We'd point out that stocks like Applied Materials and Novellus are the ones you want to own leading into an upturn. But at current prices, we think investors should wait for these stocks to get cheaper before making an aggressive move into the sector. AdvocateDevil