Merrill Downgrades Chip-Equipment Makers

Merrill Lynch lowered its midterm investment ratings on several large semiconductor-equipment companies, a day after one of group's best-known names, Novellus (NVLS Quote), took down its guidance for the third quarter.

The brokerage firm downgraded Applied Materials (AMAT Quote), KLA-Tencor (KLAC Quote), Lam Research (LRCX Quote) and Novellus to neutral from buy, citing an "increasing likelihood of pushouts and order cancellations," amid weak demand for chip equipment.

Merrill pointed out that although weakening orders are running as expected, delays and cancellations will be more pronounced than anticipated, particularly at foundries and second-tier Asian chip manufacturers.

"The culprit of course is the weak end-market demand combined with some inventory builds in chips in the previous quarter," analyst Brett Hodess wrote in a research note. "We believe the stocks will likely tread water until signs of an order bottom emerge."

Novellus and Applied Materials were higher in recent trading, while Lam and KLA were losing ground.

On Thursday, UBS Warburg cut its ratings on four chip-equipment stocks, primarily because of their valuations. The firm cut Novellus and Logicvision (LGVN Quote) to buy from strong buy and lowered Lam Research and Newport (NEWP Quote) to hold from buy.