Slowdown Fears Slug Applied Materials

The stock slumps as concerns mount about the end of the chip-equipment cycle.
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Applied Materials

(AMAT) - Get Report

led a pack of chip-equipment makers on a downward slide Wednesday, as concerns mounted that the sector was nearing the end of a cycle.

For Applied, the No.1 maker of semiconductor equipment, a strong quarter was not enough to offset the Street's worries. Shares of Applied sank roughly 5.2%, or 92 cents, to $16.93 in late afternoon trading Wednesday, a day after the Santa Clara, Calif.-based company

beat analysts' estimates on both the top and bottom lines.

But investors seemed to take the company's forecast of a 5% to 10% increase in orders as evidence that business in the second half of the year would slow down. Last quarter, Applied had guided orders to grow between 15% and 20%.

American Technology Research analyst Bill Ong said that Applied's order guidance was the latest in a pattern of sequentially decelerating bookings from chip-equipment makers.

He pointed to

Lam Research

(LRCX) - Get Report

, whose latest order guidance calls for a 10% increase at its midpoint, compared with 20%-plus gains projected in each of the two previous quarters.

These slowing order patterns, combined with macroeconomic concerns about rising interest rates and oil prices, among other issues, are raising fears that chip-equipment makers are nearing the peak of a cycle.

"It may or may not happen, but when you have this type of string of strong bookings you start to get a little more cautious," said Ong, who owns shares of Applied in his 401k and who downgraded his rating on the company's stock last week.

Indeed, shares of Lam were down 1.5%, or 71 cents,

KLA-Tencor

(KLAC) - Get Report

was off nearly 2%, and

Novellus

(NVLS)

was off 0.3%, or 8 cents.

Spending on semiconductor equipment is expected to increase 14.3%, to $38.8 billion in 2006, with end demand for consumer electronic devices driving much of this growth, according to industry research firm Gartner.

Despite the strong demand, third-party chip manufacturers, or foundries, such as

Taiwan Semiconductor Manufacturing

(TSM) - Get Report

, have been very cautious about purchasing new equipment to expand production capacity.

According to Applied Materials, growth in the second quarter was led by sales of equipment used to make memory chips like flash and DRAM, as well as LCD panels.

The company's profit surged 35% year over year in the quarter to $412.8 million, or 26 cents a share, on revenue of $2.25 billion. Analysts polled by Thomson First Call were expecting the company to earn 23 cents a share on sales of $2.14 billion.

In the current quarter, Applied expects to earn 28 cents to 30 cents a share, with revenue between $2.36 billion and $2.47 billion.