NEW YORK (Dow Jones)--While a recovery should be in the cards for the U.S. economy, the surge in semiconductor capital equipment companies' stock prices has been stronger than their earnings are likely to be.
That's the rationale behind Banc of America Securities analyst Mark FitzGerald's downgrade of several companies in the sector, namely Applied Materials Inc. (AMAT), KLA-Tencor Corp. (KLAC), Novellus Systems Inc. (NVLS) and Lam Research (LAM), to neutral from buy, and of Credence Systems Corp. (CMOS) to sell from neutral.
"We are not optimistic that the earnings power of the semi-equipment group into 2004 can sustain the current rally," FitzGerald wrote in a research note Tuesday, adding that "Slower growth, heightened competition and lack of new applications suggest to us that industry profitability will fall short of the 1990's cycles."
FitzGerald predicts that even a rebound-induced improvement in these companies' fundamentals couldn't push higher the stocks which, lifted by the silicon cycle and anticipation of a recovery, have outperformed the market in recent months.
"But if our industry view is correct we'd expect the group to underperform in 2004 as the earnings story lags prior cycles and falls short of current projections," wrote FitzGerald, who suggests investors seize any further rallies this year as selling opportunities.
Some time during the second half of 2003, he expects Wall Street to lower its "too aggressive" earnings expectations, which call for 23% to 35% year-over-year growth.
And with "little or no upside" to PC chipmaker spending, FitzGerald expects capital expenditures to grow only 12% in 2004, with Intel Corp. (INTC) spending flat to 15% lower in the coming year, and DRAM spending flat to up 10% in 2004. Combined, Intel and DRAM spending make up nearly half of total cap-ex.
"Non-PC chipmakers would need to grow cap-ex 50% to 60%, in our view, to get total spending to the 30% average," he said, adding "It's not a very realistic scenario given our industry view."
-By Michelle Rama, Dow Jones Newswires; 201-938-4046; [email protected]
(END) Dow Jones Newswires
06-10-03 0916ET
Scuba
Fear blind us opportunity, greed blind us the danger
=DJ Semi Cos' EPS Growth Seen Insufficient To Maintain Rally
Scubawarrior
31
10-06-2003 06:30
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