Novellus Undone by Merrill Downgrade

Updated from 9:33 a.m. EDT

Novellus (NVLS) said Monday morning that second-quarter earnings rose fivefold from a year ago, thanks to margin improvement leveraged to robust semiconductor-equipment demand that Wall Street worries is peaking. Management also forecast a robust financial outlook for the quarter under way, and sought to allay investor fears about what many fear is a looming slowdown in the chip industry.

But the stock was recently down $1.76 or 5.7% to $29.29, as the semiconductor equipment space was the subject of negative research Monday by Merrill Lynch. The brokerage firm downgraded Intel to neutral from buy and the semiconductor equipment space to neutral from overweight. Other stocks falling included Applied Materials, ASML and KLA-Tencor . The Philadelphia Stock Exchange Semiconductor Index was recently down 3.3%.

Monday morning the San Jose, Calif., company said it earned $37.8 million, or 25 cents a share, in the three months to June 26, up from $7.4 million, or 5 cents a share, last year. The latest quarter included an acquisition-related charge, excluding which the company earned $43.9 million, or 29 cents a share. Second-quarter sales were $338.2 million, up 41.5% from last year.

Excluding the charge, analysts surveyed by Thomson First Call had been forecasting earnings of 26 cents a share on sales of $331.3 million in the latest quarter.

Novellus forecast revenue of $408 million to $418 million for the quarter now under way, which includes $20 million to $25 million of sales from its recent acquisition of Peter Wolters, a private German manufacturer of machine tools. Earnings should range from 37 to 39 cents a share, the company said. The consensus estimate was for revenue of $361 million with 31 cents in EPS.

At ThinkEquity Partners, analyst Suresh Balaraman said the likely cause of Novellus' selloff was growing jitters over Tuesday's quarterly report from lead chipmaker Intel, exacerbated by Merrill Lynch's downgrade. "I think Intel is carrying the day and putting a pall on the whole group," he said. "But results from Novellus were very good. The margins were nice, better than what most have expected." (Balaraman has an accumulate rating on the stock; his firm hasn't done banking for it.)