Ax Notebook: The Semiconductor Industry Gets Off the Canvas - TheStreet

Ax Notebook: The Semiconductor Industry Gets Off the Canvas

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Analysts covering semiconductor-equipment makers have had a humbling 12 months or so. Starting a few months after last fall's Asian-tinged retreat in the industry, these analysts have called for industry comebacks just about every month even as stock prices continued to head south.

Now the analysts are aiming more modestly to predict a bottom.

Exactly a year and a day after the Asian contagion hit Wall Street, there seems to be a consensus that the semiconductor-equipment makers' problems -- led by excessive capacity cutting into capital spending -- are nearing an end.

"The first inflection point, the end to a deterioration in business, is evident on average throughout the industry," wrote

Credit Suisse First Boston's

Elliott Rogers to clients this week. The second inflection point, signifying an actual upturn, he said, could come as soon as 1999's first quarter. Rogers, who is a newly minted 1998

Institutional Investor

all-star, made a prescient warning in early July not to re-enter semiconductor-equipment stocks.

Morgan Stanley's

Jay Deahna, another 1998 all-star, points out that September's semiconductor-equipment book-to-bill ratio was 0.57, flat with a revised number from August. "We believe a bottom is forming in book-to-bill ratios," says Deahna. A ratio above 1 is a good sign for semiconductor-equipment stocks; a ratio below 1 indicates that supply is still ahead of demand. For example, in September 1997, the book-to-bill ratio, denoting the value of orders for each dollar of equipment shipped, was 1.05, according to the

Semiconductor Equipment and Materials International

.

Investors already are counting on better performance. The

Philadelphia Stock Exchange's

semiconductor index is up 32% since Oct. 8, when the index hit a 52-week low. Semiconductor companies, led by

Intel

(INTC) - Get Report

, are also showing signs of life.

The Santa Clara, Calif.-based bellwether reported third-quarter earnings of 89 cents per share, 9 cents above the consensus estimate, a boost to bullish Intel analysts such as Morgan Stanley's Mark Edelstone and

Piper Jaffray's

Ashok Kumar. "We've absolutely seen a big turn in the industry after the second quarter," says Edelstone, who says the second quarter was a bottom for semiconductor stocks. He adds that the turn came "when we had a peak number of negative preannouncements and the highest negative momentum in terms of revenues." Edelstone, along with Kumar, rates Intel a strong buy. (Piper Jaffray hasn't participated in any of Intel's offerings. Morgan Stanley has participated in an underwriting of Intel put options in the last three years.)

Merrill Lynch's

Tom Kurlak -- who is slowly turning into a grizzly -- isn't giving up the fight, however. After Intel reported, he told clients: "We estimate that orders are flattening recently, implying a peaking of new order level entering the fourth quarter." He predicts Intel will earn 90 cents per share in its December quarter, 8 cents below last year's figure and 4 cents below the early line.

Edelstone sees Intel earning 99 cents a share in its fourth quarter, but "I think there is an upside to that number." Bears are worried that Intel will continue to lower PC chip prices to stay competitive with

Advanced Micro Devices

(AMD) - Get Report

, which will hurt earnings going forward. Edelstone argues, however, that inventories are low, and demand is on the upswing, a factor that should outweigh declining PC chip margins. If Intel reports a strong fourth quarter, this will be good news for semiconductor-equipment stocks.

Laidley's Crystal Ball Works

Credit Suisse First Boston analyst Wendell Laidley was on the money Monday when he predicted that

Veritas Software

(VRTS) - Get Report

would announce a major deal after the close with a computer vendor to allow

Microsoft's

(MSFT) - Get Report

Windows NT to expand its customer base.

Veritas stock jumped to a three-week high on Monday in anticipation of the news. Veritas, a maker of software that helps businesses manage data, said it had agreed with

Dell

(DELL) - Get Report

to bundle some of its products for Windows NT 4.0 and 5.0 into a wide range of Dell hardware servers and storage.

Laidley says he sees this agreement as an opportunity for a broad base of customers to get a taste of Veritas' software, which will eventually lead to further sales. He predicts this agreement will be the first of many in the "very near term, which should collectively reinforce Veritas' emerging Windows NT leadership position."

Laidley -- who maintained his 12-month stock target of 60, or 60 times 1999 estimated earnings per share of $1 -- isn't sure how quickly Veritas' strategy will take hold, so he continues to rate Veritas a buy, one peg below his firm's top rating of strong buy. CS First Boston has no underwriting relationship with Veritas.

Veritas was still surging at Tuesday's close, trading up 1 1/8 at 49 3/8.

For more info on institutional holders of these stocks, as well as financial statements and earnings estimates, please see the

Thomson Company Reports.