Updated from 12:28 PM EDT
A blunt downgrade of chip stocks from Merrill Lynch knocked semiconductor stocks down across the board this morning, including leviathan
, which issues its midquarter update later today.
A report from analyst Joseph Osha said semiconductor shares have simply gotten too pricey given the still-uncertain outlook for growth in earnings.
"As the spring has progressed, it is becoming apparent that the semiconductor business has been benefiting mostly from easy comparisons and low inventory," Osha said in a research note. "We believe that the early semiconductor upturn has now played itself out."
Osha said his specific concerns on Intel "relate to the lack of visibility into the PC end market, particularly on the corporate side, rather than anything company specific."
In recent trading, Intel was down 4.1% to $27.01. The Philadelphia Stock Exchange Semiconductor Index was off 3.1%. Other stocks downgraded by Merrill also were lower: Texas Instruments
had given up 2.1%; Linear Technology
was down 5.1%; Semtech
was off 6.4%, and
was down 9.3%.
Osha also joined a slew of other analysts in predicting Intel will throttle down revenue forecasts toward the lower end of the $6.4 to $7 billion range it gave earlier, to a range of $6.5 to $6.8 billion. The Merrill Lynch analyst had said last week that he expects Intel's June-quarter revenue to stay sequentially flat, at $6.76 billion, reducing his earlier estimate of an increase to $6.96 billion.
Analysts currently expect second-quarter revenue of $6.7 billion, according to Thomson Financial/First Call.
The Street will scrutinize Intel's pronouncements today amid growing evidence that a hoped-for pickup in semiconductor sales won't materialize in the second half of the year.
Two of the primary concerns: lackluster demand and
full inventory shelves. Tuesday,
retracted its earlier forecast of a "muted recovery" for PC demand in the second half, saying it expected to see revenues fall instead. Last Friday, Robertson Stephens analyst Dan Niles said he believed retail PC inventories had surged from about one month at the end of last quarter to two months at the close of this quarter.
Today's note from Osha echoed worries that inventories have been restocked, which will likely check demand down the road. "We believe, and the data indicate, that at least some of the strength in Q1 derived from a rebuilding of inventories," he wrote. "Although we don't have data in hand for Q2 yet, our checks indicate that inventory levels in the handset and PC markets increased again in the second quarter."
Industry bellwether Intel also suffered weak sales in April and May, he said, and prospects for a sales pickup in the last month of the quarter don't look good. "With one month remaining and few signs of a near-term PC upgrade cycle, the prospects for sequential growth in the June quarter are quickly fading," noted Osha. "Closely watched Taiwanese motherboard and laptop unit shipments look to be flat sequentially in May, after a 17% decline in April."
Yesterday, the Semiconductor Industry Association, a trade group, halved its earlier forecast for 2002, saying chip sales should increase by 3.1% instead of the 6.4% growth it forecast last November.
In light of the continually postponed pickup in demand, Osha concluded that most semiconductor stocks simply look overvalued. "The likelihood of a stronger recovery has been evaporating as the year has progressed. That means coming to terms with the fact that we're paying a median 51x 2002E earnings and 32x 2003E earnings for the group. We don't like the odds of making money during the next three quarters on those valuations," he said.
The 33 companies in Merrill's semiconductor universe are trading at 78% above 1998 trough levels.
Osha advised investors who want to stay in the sector to rotate into more attractively valued names outside the U.S., singling out
. Merrill Lynch has done investment banking for Taiwan Semiconductor.