Samsung Cutbacks Raise Chip Concerns - Citi

Applied Materials (AMAT) shares are trading off sharply this morning after Citigroup’s Timothy Arcuri cut his his rating on the stock to Hold from Buy. He also cut estimates on KLA-Tencor (KLAC), Novellus (NVLS), Lam Research (LRCX) and Advanced Energy Industries (AEIS).

Arcuri reports in a research note that he sees AMAT’s Q3 semi equipment orders tracking down 5%-10% in sequentially off a Q2 that was at the low-end of guidance due to push-outs from Hynix that now also includes Samsung and Taiwan Semiconductor (TSM).

Arcuri writes that there have been “big changes at Samsung,” where the company has “significantly downsized” second half orders, with its Line16 now planned as “a stripped down copper fab” with re-used tools rather than a “full-blown production fab.” He says this is part of a strategic shift in which Samsung “appears to be moving away from wholesale capacity adds” and toward a just-in-time spending approach.

While Samsung’s more conservative stance is a long-term positive for the supply/demand equation in the memory sector, Arcuri says it “stifles our optimism” for a big Q4 recovery and “drives further risk” to second half fundamentals in the supply chain.

Arcuri says that estimates “still have to come down a lot.” For AMAT, he now sees EPS for the October 2008 fiscal year of 71 cents, down from 81 cents; for ‘09 he goes to 85 cents, from $1.32. For KLA-Tencor, his June 2009 estimate drops to $2.23, from $2.85. For Novellus, he goes to 28 cents from 55 cents for this year, and to 89 cents from 92 cents for next year. For Lam, his June 2009 fiscal year estimate drops to $1.04, from $1.97. For AEIS, he goes to 35 cents from 41 cents for this year, and to 63 cents from 76 cents for next year.

Arcuri takes his price target for AMAT down to $20 from $25; for KLAC, he goes to $50, from $56; for NVLS, $21, from $24; for LRCX, $36, from $47; for AEIS his target stays $14.

Comments

[Cherylcotterill]

Citgroup? I'm quite concerned for their investors--Citigroup is simply not being straight with them.

The worst is still to come for Citigroup.