K.C. Swanson

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Forecasts Keep Shrinking for Chips and PCs

K.C. Swanson

With PC companies and chipmakers cutting forecasts every time you turn around, it was only a matter of time before someone pointed out another, equally vulnerable link in the chain: the outfits that sell equipment to make semiconductors.

Despite the dimming near-term outlook for finished tech goods, analysts have for the most part maintained their sunny outlook for chip-equipment suppliers. But Tuesday, Morgan Stanley analyst Steven Pelayo issued a report calling into question what he called "unrealistic" forecasts for the chip-equipment sector, given looming spending cutbacks by chipmakers.

He cut price targets and estimates on a broad swath of chip-equipment makers, aiming to reflect current expectations for 25% growth in 2003. Included on the list were Applied Materials AMAT, which dropped 5.9% in trading; Lam Research LRCX, off 6%; Teradyne TER, down 9.1%; and Novellus NVLS, which dropped 9.8%.

In a research note, Pelayo pointed to the growing disparity between existing revenue growth forecasts for equipment companies and diminished expectations for spending by their customers, the chipmakers.

First Call consensus revenue forecasts for the average equipment company suggest that revenue will grow by a whopping 40% in 2003, and that premier names such as Applied Materials, Novellus and Lam Research are expected to produce 50% growth. Yet Pelayo said he expects capital spending by chipmakers to grow by only 20% in 2003.

He revised that outlook down from an earlier forecast of 30%, in the wake of recent meetings with a slew of Asian-based chip and chip-equipment companies. Leading foundries such as Taiwan Semiconductor TSM and United Microelectronics UMC are starting to hedge about whether they'll actually spend their 2002 capital spending budgets, he noted.

"Unfortunately, the primary takeaways from our [Asian] trip continue to suggest a slower than previously forecasted recovery in 2H02 and beyond, with pushouts and minor cancellations on the rise," he wrote.

In another blow to besieged tech stocks, analysts at two other investment banks chopped estimates Tuesday on leading names Dell DELL and National Semiconductor NSM.

The stocks fell 2.5% and 16.8%, respectively, in Tuesday's trading.

Citing reduced expectations for PC sales, Merrill Lynch trimmed second-half revenue estimates for Dell by a relatively minor 4%, adding that it considers the company to hold "an extremely strong competitive position."

More worrying for investors: Merrill's accompanying research note outlined the bank's reduced forecast for PC unit growth in 2002. Following similar moves at other banks, Merrill slashed its growth expectations for computers from 10.5% to 2.5% this year, citing likely weakness in state government spending, still-hesitant corporate spending and signs of a slowdown in consumer purchases.

Meanwhile, Salomon Smith Barney analyst Jonathan Joseph cut his rating on National Semi to neutral from buy, reduced earnings estimates by nearly 30% and dropped his price target on the stock from $45 to $25.

He cautioned that inventory troubles were likely to weigh on the stock both in the next few months, as customers work off an existing buildup, and later in the year, when an impending market share battle among cell phone makers Qualcomm QCOM, Motorola MOT, Nokia NOK and Samsung could result in a glut of supply. In turn, that could mean component makers such as National would confront more excess inventory, Joseph said.