Rivals Say Joseph's Chip Call Too Early: Call of Day (Update2)
By Danielle Sessa
New York, April 12 (Bloomberg) -- With the Philadelphia Semiconductor Index up 29 percent in a week and Salomon Smith Barney Inc.'s Jonathan Joseph saying it's time to buy again, bearish chip analysts are on the defensive.
Lehman Brothers Inc.'s Daniel Niles, who published a seven- page report Monday predicting a further slide for semiconductor stocks, reiterated that call today in a four-paragraph note. Joseph Osha of Merrill Lynch & Co. told clients the slide in chip sales is picking up speed.
``We think that a bottom to semiconductor industry fundamentals is still at least a quarter away, and would advise against going overweight in semiconductor stocks right now,'' Osha wrote in a report.
The reports from Osha and Niles show that Joseph's upgrade yesterday of semiconductor stocks is setting the agenda for now on Wall Street. With the stocks rallying, Niles and other analysts will feel pressure to follow Joseph in recommending chip shares, investors say.
Joseph said the semiconductor business is so bad, it can't get much worse. He raised his ratings on eight chip stocks, including Intel Corp. and Texas Instruments Inc., and helped spark an 8.5 percent rally in the Philadelphia semiconductor index.
The index climbed another 6 percent today to 597.92, which is still down 55 percent from its peak of 13 months ago. Micron Technology Inc. rose $4.81 to $46.41, Novellus Systems Inc. gained $4.23 to $48.23 and Applied Materials Inc. rallied $3.44 to $49.47.
`Sitting on Their Hands'
``When one guy comes out and makes a call and the stocks are moving and everyone else is sitting on their hands, they get beat up by their own research directors saying, `Stocks are moving, what are you going to do about it?','' said Ken Tyszko, a portfolio manager at Oberweis Asset Management, which has $200 million in assets. He said he's not yet ready to buy semiconductor shares.
Niles isn't changing his mind. This week's chip rally looks like the 37 percent surge in the semiconductor index, known as the Sox, from mid-December to the end of January, he said in a report.
That advanced faded, ``with new lows being set,'' he wrote today. ``We believe this rally will suffer the same fate.'' The latest signs of weakening demand for chips include further signs of deterioration since his report earlier this week including Motorola's $500 million inventory write-off and falling memory chip prices, he said.
Niles said on Monday that semiconductor sales this year are likely to post their biggest decline on record and told investors to wait until October to buy. He's ranked the No. 2 chip analyst by money managers in Institutional Investor magazine's annual survey.
Still Too High
Osha said he doesn't see semiconductor shares bottoming until June or July. The stocks are still more expensive than during the last semiconductor slumps, in 1996 to 1998, and if revenue falls further, the shares will fall further, said Osha.
The companies in the Philadelphia index sell for 19 times recent earnings, versus a low of 9 in 1996.
Osha predicted the semiconductor index could slide to 400, which would be a 33 percent drop from its current level. He, like Joseph, was a runner-up last year in the magazine survey.
Joseph's call prompted a response from his competitors in part because he made a splash last year when he advised investors to sell. The benchmark chip index slid 51 through Tuesday after that call.
Mark Edelstone of Morgan Stanley Dean Witter & Co., the top- ranked semiconductor analyst, didn't return a call.
Other analysts also panned chip stocks today. J.P. Morgan Securities Inc. analyst Eric Chen lowered his recommendations on communication-chip makers Applied Micro Circuits Corp., Vitesse Semiconductor Corp. and PMC-Sierra Inc.
``We do not believe these stocks represent a compelling value,'' Chen wrote in a report, ``given the lack of strong demand in communications equipment markets.''
He predicted the inventory surplus would clear up by the third quarter as customers work through existing components.
Credit Suisse First Boston analyst Michael Masdea made bearish comments about analog semiconductors. While January and February were the worst two months ever for the industry, things are going to get worse, Masdea said.
Analog-chip stocks historically bottom when the group trades at a price-earnings ratio that's 40 percent below the overall PE ratio for the semiconductor industry, Masdea said. Analog stocks now sell for 20 percent above the broader chip universe, he said.
While time will tell which analyst made the right call, some investors appreciate recommendations like Joseph's that buck the consensus.
``It's sort of a bold stroke for an analyst to go out on a limb like that,'' said Scott Vergin, a fund manager at The Lutheran Brotherhood Inc. in Minneapolis, who oversees about $4 billion. ``For portfolio managers, we would rather see an analyst take a stand than report what's on the table.''
quote.bloomberg.com |
