Subdued guidance from Applied Materials ( AMAT) yesterday was no shocker. Itonly confirms what plenty on the Street already believed: These are tryingtimes for investors in chip-equipment companies, which have lately beenpummeled on news of slackening demand for semiconductors. In midafternoon trading, AMAT shares were off 1.9%, or 26 cents, to$13.20. Other chip-equipment concerns were mixed: Novellus ( NVLS) was up 2%, or51 cents, to $25.51; Lam Research ( LRCX) was down 1.3%, or 16 cents, to$11.97; and KLAC Tencor ( KLAC) had lost 1.1%, or 39 cents, to $35.02. In research notes out this morning, analysts focused not on AMAT'slargely respectable results -- it beat sales and earnings estimates -- but onthe negative near-term outlook for orders. Yesterday the company predictedbookings will fall 5% to 15% for the quarter that's under way. In fact, that forecast is actually worse than it appears, since AMAT'sbookings for the most recent quarter were lower than expected (with only 5%growth compared with a forecast of 10%). If AMAT had met its initial orderguidance, the new guidance for the October quarter would represent asequential drop of 9% to 19%, pointed out Shekhar Pramanick, an analyst atPrudential Securities. At Needham, analyst Cristina Osmena said she expects AMAT's order bookto keep deteriorating for the rest of the year, with growth not likely toresume until the second quarter of 2003. She cut her price target from $25to $17.
There's "still no rush to own the stock or semiconductor equipmentgroup," summed up Deutsche Bank's Timothy Arcuri. Though AMAT is still oneof the best-positioned equipment companies and claims an exemplary balancesheet, it's now at the mercy of end-market demand, he wrote in a researchnote. And it's not yet cheap, either, trading at three times book value. Inthe past, the stock has hit troughs as low as 1.8 to 2 times book value. His conclusion: "We are probably still stuck in a trading range withfundamental hurdles and valuation keeping a lid on the stock." He has aprice target of $18 on the stock. Amid the mostly unimpressed readings of AMAT's results, though, therewas one exception: Bear Stearns analyst Robert Maire thinks the sharescould zoom to $40 over the next year. That's more than double what manyother analysts expect. "Weighing all the factors, the AMAT report wasbetter than expectation, and while things are weakening, we are still waybetter off than the trough of nine months or so ago," said Maire in a notethat pointed to what he called "attractive" valuations. Besides showing the nasty turn the equipment industry has taken, AMAT'sresults also revealed the sudden, painful weakening in a key component ofits customer base: Taiwanese foundries. While not entirely unexpected,further evidence of the trend will come as a disappointment to investors in Taiwan Semiconductor ( TSMC) and United Microelectronics ( UMC), companies that haveoffered somewhat of a haven from the growing bearishness on chips. Bothhave recently been scoring new business as leading chip companiesincreasingly outsource their manufacturing to save cash. But they're clearly struggling, too: As a percentage of AMAT's totalorders, demand from Taiwanese manufacturers dropped in half from the secondto the third quarter, declining from 39% of bookings to only 18%. "Thedeclining orders out of Taiwan corroborates news that equipment industryorders started to falter by the beginning of June and that the majorTaiwanese foundries are expecting lower utilization rates in the thirdquarter," noted Osmena. Today Taiwan Semi was down 2.4%, or 21 cents, to $8.60, while UMC wasup 0.6%, or 3 cents, to $4.88.