Leading chip-equipment stocks have lost huge chunks of their value amid a selloff that has accelerated for several weeks before Monday's rally. But it's too soon to call them cheap, some analysts caution.

In fact, there's still plenty of room for the stocks to slump further.

Even after rising Monday, the extent of losses in the sector is stunning. Major names have seen their value nearly cut in half in a matter of months. Since April 1, the S&P's semiconductor equipment index is down 47%.

Among individual stocks,

Applied Materials

(AMAT) - Get Report

has lost 46% since hitting its April high, while

Lam Research

(LRCX) - Get Report

is down 57% in the same period. Shares of

KLA-Tencor

(KLAC) - Get Report

and

Novellus

(NVLS)

are off 44% and 48%, respectively, from their March peaks.

Tough Environment

But ultralow prices don't translate to bargains for chip-equipment stocks. By valuation measures, many stocks remain well above the trough levels they hit in previous cycles, meaning there's room for prices to fall still more.

"Stocks have moved from 'expensive' to 'reasonably valued,' but still not 'washed out,'" wrote Deutsche Bank analyst Timothy Arcuri, who covers semiconductor-equipment stocks, in a research note issued last Friday.

His take is that prices for the group would need to fall another 30% to 40% before they hit what he calls "back up the truck" levels -- in other words, before they get cheap enough for investors to brush aside the group's still-weak business outlook.

Equipment makers have been saddled with fundamental worries based on a string of capital spending cuts by chipmakers, plus their own admissions that business appears set to worsen in the current quarter. Both Novellus and Lam said last week that their sequential bookings are likely to actually decline.

Though the increasingly bearish outlook of the past few weeks has further knocked down stock prices, values still look a little on the pricey side. On a price-to-earnings basis, the combination of Applied Materials, KLA-Tencor, Novellus and Lam trade on average about 24 times consensus estimates for 2003, Arcuri pointed out. Given that the forward P/E has historically ranged from about 10 to 28 (excluding the atypical boom cycle from 1998 to 2001), a multiple of 24 doesn't exactly look like a bargain.

To put that into perspective, the

S&P 500

has now retreated to trade at 15 times 2003 earnings, reverting to levels last seen in the mid-1990s.

"The implication is that, even if current 2003 consensus is achievable

for chip-equipment names (and we still think it will come down over the next few months) earnings multiples are still on the upper end of the historical range," Arcuri wrote in his report.

Trick or Treat

On the bright side, companies such as Applied Materials and KLA-Tencor have solid balance sheets and are cash-flow positive, Arcuri wrote. "But you can't ignore the witch's brew of valuations and (potentially worsening) fundamentals right now that at least to us is not quite palatable yet."

Likewise, on a price-to-book basis, stocks of most companies in the sector have room to drop before they reach the lows of the most recent cycle.

"AMAT, KLAC and

Teradyne

(TER) - Get Report

are still above '98 valuation lows," said Gregory Konezny, an analyst at US Bancorp Piper Jaffray. Currently trading at about 3.4 times book, Applied Materials is approaching its 1998 bottom of 2.8, but still has room to fall further, he said.

One exception is Novellus, which rattled investors earlier in the earnings season when it predicted orders will drop up to 10% in the current quarter. The stock now changes hands at about two times book value, below its 1998 bottom of around 2.5 times book and about on par with its 1996 bottom.

"We're not saying it's the bottom, but for those who want to pick the bottom, Novellus looks like a good trading opportunity to us," said Konezny. "For other names, I still think there's some negative news coming that could push these names lower, to '98 valuation levels or even beyond that."

Investors will get a better sense of the near-term outlook for the industry Tuesday, when KLA-Tencor releases its financial results for the June quarter.

Still, more important for sentiment will be Applied Materials' release of its quarterly financial results on Aug. 13. Last week, in a somewhat optimistic sign, CEO James Morgan said at a trade show that he thought industry forecasts for 29% revenue growth next year are on target.