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Smith Barney raised its rating and revenue estimates on the semiconductor-equipment industry, saying an improvement in sector fundamentals is around the corner.

Analyst Glen Young believes a sharper recovery than he previously forecast is possible within the next four to 12 months and is most likely in the first half of 2004. The analyst said the chip industry is improving along with the overall economy, which backs up his belief that semiconductor companies are next in line.

As a result, Young raised his rating on the chip-equipment stocks to overweight from market weight. He lifted the price targets of many of the companies he covers as well, and he expects an average upside of 25% from current prices.

Young now sees an increase of 20% to 25% in 2004 revenue for the chip-equipment sector, up from his previous estimate of 16% growth. He also sees 2005 sales rising 25% to 30% from a prior expectation of 26% growth.

His favorite stocks in the sector are

Applied Materials

(AMAT) - Get Applied Materials, Inc. Report

,

Novellus

(NVLS)

,

Axcelis Technologies

(ACLS) - Get Axcelis Technologies, Inc. Report

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and

Lam Research

(LRCX) - Get Lam Research Corporation Report

.

The analyst also raised

ATMI

(ATMI)

and

Credence Systems

(CMOS)

to in-line from underperform.

Entegris

(ENTG) - Get Entegris, Inc. Report

was downgraded to in-line from outperform.