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Analyst reports: Growth concerns smite semiconductor stocks

Semiconductor shares tumble after influential analysts describe an industrywide slowdown that could extend through the middle of next year.

Semiconductor shares tumbled Wednesday after influential analysts described an industrywide slowdown that could extend through the middle of next year.

Chip and chip-equipment companies such as Altera, Xilinx, Applied Materials and KLA-Tencor fell in the wake of the bearish reports.

Programmable logic chipmaker Altera led the decline, falling 18 percent to $33.56. The company said in a statement on its Web site that fourth-quarter sales will grow in the range of 12 percent to 15 percent, on the low end of its earlier guidance that was announced just two weeks ago.

Lehman Brothers analyst Dan Niles, who downgraded Altera earlier in October, penned an "I told you so" report this morning, blaming the company's sluggish growth on telecom companies such as Lucent Technologies, Nortel Networks and Cisco Systems that stockpiled inventory in the early part of the year and will now be forced to reduce their purchases.

"Altera is finally seeing what we anticipated when we downgraded the stock in early October," he wrote. "We believe the 12 percent guidance may prove optimistic."

Niles did not mince words about his bearish outlook for the entire industry, which he said should leave no semiconductor company unscathed, although some will be more affected than others.

"We believe Altera's problems are more industrywide and that communications OEMs (original equipment manufactures) have been pushing out orders to many of their semiconductor suppliers in late October and it will probably get worse," Niles wrote. "In our opinion, it is only a matter of time before many suppliers (depending on their position in the food chain) admit to the same issues."

As an example, Niles pointed to Cisco, whose inventory he said grew 77 percent between January and July, while revenue grew 31 percent.

"We believe that inventory at Cisco grew faster than revenues again in the October quarter but that they will lower these levels in subsequent quarters given an easier supply environment," Niles wrote. "We believe inventory adjustments are going to be a major issue in the December quarter for the semiconductor manufacturers."

"We also note that subcontractors and distributors typically hold additional inventory for Cisco and other (communication) equipment vendors, and that they will probably show the same trends. As a result, we do not expect much pickup in semiconductor demand as the quarter progresses."

Morgan Stanley Dean Witter analyst Jay Deahna also downgraded chipmakers Applied Materials and KLA-Tencor to "outperform" from "strong buy," citing a slowdown in personal computing and telecom equipment spending.

Deahna also downgraded semiconductor equipment maker Lam Research to "outperform" from "strong buy," and cut his forecast for global semiconductor capital spending growth to 10 percent to 15 percent, from 30 percent.

Investors heeded the analysts' warnings, driving down shares of several semiconductor companies. In addition to Altera's 18 percent decline, shares of competitor Xilinx fell $2.56, or 3.54 percent, to $69.88.

Applied Materials fell $2.31, or 4.35 percent, to $50.81. KLA-Tencor dropped $1.19, or 3.51 percent, to $32.63, and Lam Research declined 81 cents, or 4.19 percent, to $18.56.

"I think these problems are pretty much going to persist through Q4 and into Q1," Niles said.