Applied Materials: Citigroup Thinks Semi Bottom Is In

Has the semiconductor equipment sector hit rock bottom? Citigroup’s Timothy Arcuri thinks conditions in the industry may finally have gotten so bad that they can’t get any worse. Which for the stock, he says, is good. “We think chipmakers have finally reached “maintenance” cap ex,” he writes, advising that “this critical fundamental milestone warrants a more offensive portfolio headed in ‘09.”

Ergo, he raised his rating on sector leader Applied Materials (AMAT) Thursday morning to Buy from Hold, increasing his price target to $14 form $11. He maintained his EPS estimates of 37 cents for this year and $1.24 for next year. He also remains bullish on Lam Research (LRCX), which had already been Buy rated.

On the other hand, he downgrades KLA-Tencor (KLAC) to Hold from Buy, lowering his target price to $22, from $31. While maintaining his June 2009 EPS estimate of 46 cents a share, he cut his FY 2010 estimate for KLAC to $1.34, from $1.54. He says that KLAC is a “more defensive” pick than AMAT, “and has not worked very well, to boot.”

Arcuri asserts that maintenance wafer fab equipment spending for the semi industry is about $14 billion. He says in Q4, the industry has hit that run rate, and adds that 2009 revenue estimates “finally reflect the maintenance level.” Arcuri concedes that DRAM manufacturer balance sheets remain poor, but says that only about 5% of global capacity would be at risk due to permanent closure or bankruptcy. He says there is a better than 50% chance of upside to current ‘09 cap ex forecasts; he says that ‘08 and ‘09 budgets “appear to have totally eliminated any spending excesses from prior years,”

Arcuri adds that tech could be a leader in a market rebound in 2009, and that within the tech sector, “the bar is set lowest, by far, in semi equipment, where big headcount reductions have already taken place nearly across the board to re-inject leverage.”

On the other hand, Friedman Billings Ramsey analyst Mehdi Hosseini Thursday morning asserted that Applied’s January quarter bookings could be down 40%-plus, even worse than the company’s guidance of down 30%. And he sees another 15%-20% drop in the April quarter. In fact, he thinks the silicon business has eroded so much that in the October 2009 fiscal year, the company could actually see more revenue from its solar business than from its traditional semi business. He now sees Applied losing 13 cents a share in the October 2009 fiscal year, down from his previous forecast for a profit of 11 cents. He maintains an Outperform rating on the stock, but cut his target price to $11, from $13.

Hosseini also says that while AMAT has already cut staff by 12%, and asked employees to take off more than 3 weeks during the holiday season, another round of job cuts could be coming.

AMAT Thursday is up 50 cents, or 5.4%, to $9.81. KLAC is down 76 cents, or 3.9%, to $18.69.

Comments

[Ames Tiedeman:]

The semi bottom is always in 9 months before the sales recovery.

2008 Dec 13 12:06 PM