(Updated from 10:36 a.m. EDT)
Morgan Stanley Dean Witter
Jay Deahna this morning told investors to climb on the train of large-cap semiconductor capital-equipment makers.
Deahna upgraded a half-dozen companies that make the equipment needed to produce semiconductors. He upped
to strong buy from market outperform.
"The recent stock pullback creates opportunity in an upward trend," Deahna said. He said he expects the companies' stock to rise some 40% in the next 12 months to 18 months.
Deahna also said he expects this sector to rally soon, and that these companies' fundamentals have bottomed. He cited recent comments from Lam Research and Novellus indicating that new orders could rise in the second half of the year, that earnings per share estimates likely won't be dragged lower and that inventory levels are improving.
The stock of these six upgraded companies had been rising this year until weakening this month. Still, with only one notable exception, the companies Deahna upgraded already had double-digit percentage gains so far this year. The companies currently traded near their seven-month highs.
Deahna said he's optimistic because the chip sector -- a cyclical business that does well when the economy is strong -- is rapidly approaching a trough. He said he expects business to look horrible for the next two quarters, but that it won't get any worse from there. Some equipment companies could see new orders pick up as early as this quarter, Deahna said, with the majority of the uptick coming in six months. By the end of the calendar year, Deahna said he expects year-over-year growth for capital-equipment makers to re-accelerate. Then again, year-over-year comparisons will be easier then, because sales slumped in the last two quarters of 2000.
"We are betting that the current flurry of interest-rate cuts and a likely tax cut will manifest in an economic recovery next year that could potentially be better than currently expected," he wrote. If a recovery occurs, the analyst said that equipment demand would pick up in 2002 as the semiconductor business improved. The
Federal Reserve this year began a series of interest-rate cuts, which typically take at least six months to work their way through the economy.
Deahna said he thinks investors are waiting to buy if and when chip stocks fall again. He thinks Applied Materials, which closed yesterday at $51.04, could face go down to $45 -- but not to the $38 it hit on April 4, its lowest close in 2001. The company's 52-week high is $77.
The analyst also upped his price targets for four companies. ASM Lithography's target was moved to $40 from $30; Novellus, KLA-Tencor and Applied Materials were upped to $70 from $60.