CSFB: Rebound in Chips, PCs to Be Delayed

NEWYou can now listen to Fox News articles!

Credit Suisse First Boston on Tuesday downgraded a wide range of companies that manufacture semiconductor chips and chip-making equipment, adding fuel to an already inflamed debate about how long the current industry downturn will last.

Credit Suisse also said it now expects personal computer shipments to decline this year, revising downward its previous forecast that shipments would be flat. CSFB cut its forecast for 2002 PC shipment growth to 10 percent from 17 percent.

``The current downturn is more unlike than like any preceding downturn,'' the brokerage said in a note to clients. ''Current conditions are a function of both oversupply and under-demand.''

The brokerage cut its rating on the semiconductor capital equipment industry to ``market underweight'' from ``neutral'' or ''market weight.'' Semiconductor equipment includes silicon wafer, advanced circuit design and testing machines.

CSFB cut seven stocks in the sector to ``hold'' from ``buy,'' including Applied Materials, the dominant player, and also KLA-Tencor, ASM Lithography, Novellus, Varian Semiconductor and ATMI Inc.

``We are not at a bottom for SCE (semiconductor capital equipment) fundamentals, and most likely we are not within 20 percent of a bottom,'' the brokerage said.


Such ``fundamentals'' are the basic measures investors use to gauge the financial health of the industry, a notoriously boom-to-bust-to-boom sector. A rebound in chip equipment fortunes has often provided an early signal to investors that a new technology growth cycle is in store, as electronics makers must buy highly sophisticated chip-making equipment in order to build new types of devices.

But on Tuesday, CSFB poured cold water on any hopes for a quick rebound. ``Even when a bottom is established, growth from the bottom will be lackluster at best,'' it said.

The brokerage also slashed its ratings on a range of makers of chips used in communications and diversified electronics applications.

It cut to ``hold'' from ``buy'' its ratings on Altera, Applied Micro Circuit, Atmel, ChipPAC, Lattice, LSI Corp., Microchip Technology, Micrel, Maxim Integrated, Silicon Storage, and Franco-Italian chipmaker STMicroelectronics.

Several of these companies are big suppliers to Cisco Systems Inc., the top supplier of Internet network gear. Cisco is expected to post a drop in sales of between 5 percent and 8 percent in its quarterly report later Tuesday.

CSFB said in a note to clients that it stood behind its ''buy'' rating on LAM Research, one of a handful of large-capitalization stocks in the sector. It also maintained ''buy'' ratings on DuPont Photomasks, Brooks Automation and FEI Co.


Since April, rival brokerages have predicted that the chip industry would reach a bottom this summer and begin growing toward a new peak.

More recently, several analysts have argued that the worst is over, after a year of declines in the industry's basic growth measures.

Intel Corp., the world's biggest chipmaker, which provides the microprocessor brains that power most personal computers, stoked optimism in recent weeks by suggesting that PC demand would recover late this year.

Intel, whose outlook is among the most bullish of the major technology companies, argues that the year-long glut of computer chip inventories is increasingly being worked off and that new technologies will provide a fresh impetus to growth.

Semiconductor stocks have boomed over the past two weeks, with the Philadelphia Semiconductor Index, the U.S. industry's main stock gauge, gaining nearly 20 percent through last Thursday.

However, the 16-component index pulled up short on Friday and fell sharply on Monday, when analysts at Lehman Brothers and Salomon Smith Barney predicted that Intel was gearing up for a brutal price war that would cut into profit margins.

CSFB said the ``typical'' metrics used to measure the ebb and flow of the industry do not provide enough evidence to gauge when a rebound will occur or how deep and sustained it will be.

Specifically, the brokerage argued that measures such as excess chip inventory, factory capacity utilization, the ratio of bookings to billings, and order rates are not sufficient to predict when a rebound in fundamentals will materialize.

``We are lowering our PC unit shipments estimates for 2001 and 2002,'' CSFB computer analyst Kevin McCarthy said.

He predicted that shipments of PC units during the third quarter would be flat with the second quarter. He said that while the fourth quarter should show a rebound from third-quarter softness, ``we believe it prudent to use a more modest growth assumption given (current demand).''

McCarthy advised clients to hold back from investing new money in PC stocks. ``In this climate, investors are wise to wait on the sidelines until there is evidence of an actual demand turn,'' he said.