University of Pennsylvania
. Rogers joined
Credit Suisse First Boston
as the senior member of the firm's semiconductor capital equipment team in 1998. Last spring, when voting was under way for this ranking, Rogers made a gradual transition away from his research role to direct the firm's global technology research. Before joining CSFB, he followed these companies at
Deutsche Bank Securities
for two years, and he held a similar position at
Cowen & Co.
from 1984 to 1996.
. Pitzer joined CSFB in March 2000. He has researched this industry since 1993, most recently at
and before that, at
BT Alex. Brown
Needham & Co.
Industry Outlook and Style
Rogers has three words of advice for investors considering whether to dip into semiconductor capital equipment stocks now: "Wait until summer."
Why? Because in his view, the business climate "will get tougher before it gets better," a situation reminiscent of 1996, when overcapacity sent the chip equipment business into a downward spiral for several months.
This year, the group is getting clipped by both overcapacity and underdemand. The underdemand, Rogers says, "is a byproduct of excessive investment in infrastructure to support the Internet bubble. The bubble has burst, and excessive infrastructure will take time for the world's economies to grow into. This could extend the downturn in semiconductor demand. And as long as semiconductor demand remains subpar, so too will demand for semiconductor equipment."
However, according to Rogers, "The better companies in this highly cyclical industry tend to set higher lows and substantially higher highs -- both in business activity and in the stocks -- with each new cycle." Thus, the patient investor, he maintains, "can look forward to a very solid return over the next 24 months." However, the near-term picture will be bleak, he cautions. "These stocks will be underperformers for six months before they become outperformers."
John Pitzer, the analyst who has assumed coverage of the stocks that Rogers tracked for 14 years, looks at the stocks in much the same way his predecessor did. That is, he focuses on the handful of big-cap names that "investors care about," as he puts it. He places six companies in that camp:
. (Fellow equipment analyst Kathryn Buergert tracks ASM.)
"These companies have the largest
market caps and the largest revenues as a percentage of the industry," he explains.
Between late 2000 and the end of January, the big six had already climbed some 60% on average, Pitzer says. He attributes the dramatic uptick to the fact that investors are "discounting what they believe will be a quick rebound in fundamentals around the middle of 2001, at which time they believe the industry will resume a healthy growth pattern."
Notes Pitzer: "We are a bit more cautious, believing the full depth and breadth of the downturn has not been fully recognized."
Pitzer has assigned a long-term buy rating to the five major stocks he tracks. "We're saying that over 12 to 24 months, they should perform well, but that stocks historically have not discounted the trough fundamentals so early into the downturn," says the analyst. "Thus, we believe that investors might get a better buying opportunity during the summer."
Applied Materials, the industry bellwether, is the sole equipment maker that dominates in more than one segment of the market, says the analyst. Teradyne dominates the back-end testing market, though it addresses almost every segment of testing. And Lam, Pitzer says, has one of the strongest management teams. In his view, the company is poised to grow from a single-product company in the etching segment -- patterns are etched onto the chip wafers -- to a multiproduct company during the next upturn.
KLA-Tencor and Novellus are Pitzer's favorite stocks because, he says, "they are both highly leveraged to the transition toward copper interconnect and 300 mm wafers." Pitzer predicts that in 2001, chipmakers -- the companies that the chip equipment makers sell their wares to -- will be more likely to invest in technology than to spend on additional production capacity.
Novellus manufactures tools that deposit materials onto the chip wafer, and Pitzer says that the company has "the most opportunity to gain incremental market share as the industry transitions from aluminum to copper and from 200 mm to 300 mm wafers." While the analyst maintains that all earnings assumptions -- including his own -- are probably still too high, for now he estimates revenue of $1.49 million and earnings per share of $1.80 for 2001.
KLA manufactures equipment that detects defects or other anomalies on wafers between process steps, making sure they are being manufactured correctly. The use of these diagnostic tools lead to higher yields, and thus to lower overall costs.
As with Novellus, Pitzer warns that earnings estimates will likely have to be ratcheted down in coming months. Based on KLA's reported fiscal second-quarter earnings for the period ended December 2000, Pitzer's updated per-share numbers are $1.85 for fiscal year 2001, ending June, and $1.35 for 2002. The lower number reflects his view that the industry will experience negative growth in the coming 12 months. (KLA earned $1.29 a share in 2000.)
Favorite stock for next 12 months:
12-month price target:
"When the cycle fundamentals begin to bottom, KLA would be our top pick, mainly due to its exposure to new technology drivers. In addition, KLA has the best chance of seeing increases in the average selling price of its equipment as it moves to those technology nodes. KLA has a dominant market share position, and there is an ever greater need for the tools it makes as the industry moves into new process technology."
Rate Their Stock Picks:
Which stock do you like best?
Miller: Lam Research
Deahna: DuPont Photomasks