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» PEIC - Chip Equipment Stocks Climb Despite Worry Of Order Slowdown

6/24/2007 8:26:56 PM
From: Donald Wennerstrom

Chip Equipment Stocks Climb Despite Worry Of Order Slowdown

Jun 22, 2007 13:55:00 (ET)

NEW YORK (Dow Jones)--At a time when some Wall Street analysts are warning of a slowdown in orders for chip-making equipment, shares of semiconductor equipment stocks have been surging.

While concerns abound that order cancellations and potential cuts in capital spending could hurt chip equipment companies in the short term, investors seem to be taking a longer-term view.

They argue that the chip equipment sector is no stranger to fits and starts, and that it pays to avoid focusing on near-term concerns. Moreover, they said, chip equipment is used by a slew of semiconductor makers, so if one area sees a slowdown, another segment may not. Not to mention that, as consumers' appetite for electronic gadgets continues to grow, so will demand for equipment to make chips that go into those devices.

"All of the chip guys are buying different equipment, and at any given time there's various degrees of demand," said Mark Mowrey, a senior analyst at Al Frank Asset Management, which owns shares of Applied Materials Inc. (AMAT) and Lam Research Corp. (LRCX). "It's impossible to make good macro calls."

In recent weeks, Wall Street analysts have been warning that slowing demand for memory chips could result in delays of equipment orders. Some even think chip companies will cut the amount of money they spend on equipment this year. Growth expectations for the semiconductor market are also coming down, with the Gartner research firm saying last month that worldwide growth will be 2.5% this year, lower than its prior expectation of 6.4%. The Semiconductor Industry Association slashed its growth target to 1.8% from 10% for 2007.
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Nevertheless, chip equipment stocks have been moving higher. Applied Material's stock is up more than 40% since setting a 52-week low of $14.39 last July, while Lam Research's shares are up 47% since a 52-week low of $36.66, also last July. Meanwhile, shares of Novellus Systems Inc. (NVLS) are trading 36% higher than their July 2006 low of $22.55, while KLA-Tecnor Corp. (KLAC) is up 46% since a low of $38.38 in July.
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The gains by those chip equipment stocks are outpacing the larger semiconductor sector, as the Philadelphia Semiconductor Index is up 25% over that period.
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Bullish investors argue that concerns over a slowdown are already reflected in the stocks and that demand will increase later in the year as consumers and corporations plunk down money for new PCs, cellphones, flat panels, MP3 players and digital cameras, all of which use semiconductors. The chip equipment market is volatile by nature, they point out, with demand appearing to weaken one day and picking up the next.

Micron Technology Inc.'s (MU) share price activity this week illustrates that volatility. Micron's stock has been under pressure over concerns of aggressive pricing for memory chips, but shares surged on comments that spot pricing for memory chips saw an uptick.
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"I think we could be in for a two- to three-year up cycle," said William Smith, president and senior portfolio manager at Smith Asset Management, which owns chip stocks. He added, however, that Wall Street analysts "won't jump on board until next year. Until it looks good on their spreadsheets, they don't want to touch it."
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Smith thinks Microsoft Corp.'s (MSFT) Vista operating system, as well as electronic gadgets, will drive the cycle. "People love gadgets; that's not going away," he said.

Meanwhile, Daniel Morgan, a longtime chip investor and portfolio manager at Synovus Trust Co., said investors are betting that things will recover next year and start to improve. He said 50% of the demand for chip equipment is outside the U.S., so a slowing U.S. economy shouldn't weigh too heavily.

"Everyone seems to be holding on to the notion that, in 2008, things will recover and improve," said Morgan. "Everyone is continuing to stay pretty bullish on tech."

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