“We believe that real and potential memory sector fundamental weakness (i.e., overcapacity), the anticipated absence of increased spending levels from major foundries, and on-going strategic spending by memory manufacturers will precipitate a capacity digestion period that is likely to ensue in [the first half] as measured by equipment order rates,” O’Rourke wrote in a note. “We anticipate a downward revision of consensus estimates for SCE [semiconductor capital equipment] companies, and despite comparatively strong mid-cycle earnings power we anticipated near-term re-tracement of recent [semiconductor capital equipment] stock gains.”
For 2007, O’Rourke says his bottoms-up analysis indicated overall semiconductor capital spending up about 2% from 2006, but says a decline “is more probable.” He notes that the industry utilization rate fell to 89.1% in the third quarter from 91.8% in the second quarter; he thinks the number will drop to the mid-80's early this year, with the foundries “likely below that.”
O’Rourke dropped Lam Research and KLA-Tencor to Hold ratings from Buy; he went to Sell form Hold on Novellus.
Also yesterday, Credit Suisse’s Satya Kumar raised his price target on KLA-Tencor to $50 from $45, asserting that the stock could trade higher heading into its coming earnings announcement, as the company files delayed 10-K and 10-Q filings, among other factors. Kumar says the consensus estimate for the December quarter and for calendar 2007 “have upside.” He also says a buyback of about $1 billion should be coming at some point in the first half. Nonetheless, he retains a Neutral rating on the stock.