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To: bruceleroy1_- who wrote (206466)	11/23/2002 8:19:04 AM
From: orkrious	Read Replies (2) \| Respond to of 436258

from today's barron's Chipmakers' Troubles May Drown Equipment Stocks By BILL ALPERT What do chipmakers get, for all their investment in production gear sold by the likes of Applied Materials? Less and less. That's why Banc of America analyst Mark F. FitzGerald wouldn't chase the current rally in semiconductor capital equipment stocks. I can't tell you how much the SEMIndex rallied, because the sponsoring SEMI trade association killed its stock index in a thrift shift on October 1. Sad timing that, because the S&P Supercomposite Semiconductor Equipment index has vaulted 65% since October 7. Applied Materials accounts for half that index, and shares of the Santa Clara giant have also risen by two-thirds over the same stretch, to a recent $17. Yet return on capital is at a 10-year low for customers of semicap vendors, notes FitzGerald. After averaging 17% returns since 1994, return on capital at chipmakers is now 2%. Demand is in the gutter, sure, but FitzGerald wonders if returns for firms like Intel or Advanced Micro Devices will ever bounce back above 10%. Don't blame today's recession. The downtrend began long ago at big semicap spenders like Intel, Micron Technologies and ST Microelectronics. Micron's return on capital peaked above 50% in 1994. Intel's peaked around 35%, in 1997. "With Intel," says FitzGerald, "the beginning of the downtrend was exactly when the first sub-$1,000 PC shipped." Tech on a tear: Ebullient tech investors pushed the Nasdaq up 58 points, or 4%, last week to 1469. Hewlett-Packard reported an upbeat quarter, selling lots of printer ink and narrowing losses in its computer operations. Things must be looking up. Chipmakers have bet on an upturn and kept investing in leading-edge gear, at a level of 20%-25% of their sales. But eyeing the long-term decline in chipmaker profits, FitzGerald fears these companies will have to reduce capital spending to a range of 10%-15% of their sales. That would have an enormous impact on the sales of Applied, Novellus Systems and KLA-Tencor. "Intel's capital spending has gone through the roof," says the analyst. After years in which depreciation charges amounted to 15% of Intel's expense for cost-of-goods-sold, depreciation rose to 34% of the latest quarter's expense item. "The question is, can they afford to continue doing that?" FitzGerald says. FitzGerald has had a dour outlook for some time, and he admits that his Thursday note on semicap stocks fell on deaf ears. Money managers tell him his ideas are interesting, but say they've got to chase high-momentum stocks like Applied in order to show good December-quarter investment performance.