Semi Equipment: Goldman Warms Up, a Little

Goldman Sachs analyst James Covello turned less bearish on the semiconductor capital equipment stocks this morning, revising his outlook for the group to Neutral from Cautious.

He writes in a research note that “three rules we use to pgrade cyclical stocks are finally close to being met:”

• He sees signs of “management capitulation,” which we says was evident at the SEMICON trade show in San Francisco last week.
• He sees the industry hitting trough margins exiting 2008.
• He also sees “signs of life on the horizon in the form of significant capex cuts.

He also says that the stocks “finally have some valuation support,” with many trading below fair value on normalized EPS; he says about 25% of the industry’s market cap is in cash.

Covello writes that he has been cautious on the sector for four years on concerns that over-investment in the memory sector in 2006 and 2007 would leave to an order downturn in equipment, which is what happened in 2007 and 2008. “Today, we feel comfortable in taking a more constructive view, as the cycle is bottoming and expectations are finally being appropriately set,” he writes. “However, visibility on the timing of a sustainable order upturn remains limited, which prevents us from going to an Attractive coverage view at this juncture.”