Semiconductor-equipment stocks helped the Nasdaq composite move up 64 points Wednesday after J.P. Morgan upgraded a handful of the sector's beaten down stocks.
On Tuesday, Applied Materials (Nasdaq: AMAT), the world's largest chip-equipment vendor, beat lowered expectations for its fiscal first quarter Tuesday, but warned that the next few months are going to be grim.
Excluding one-time items, the company earned $558 million, or 66 cents per share, for the quarter that ended Jan. 28.
After impressing with better-than-expected first-quarter earnings, the company then delivered a depressing outlook, ratcheting down projections for the current quarter to revenue of $1.9 billion to $2 billion and earnings of 32 cents to 37 cents per share.
Analysts agreed that Applied Materials' outlook was gloomy, but argued the worst may be over. Or at least the bottom is near. The "it could have been worse" line was working with investors Wednesday. Applied Materials gained as did several of its competitors.
Companies upgraded to "long-term buy" from "market performer" at J.P. Morgan were Applied Materials (Nasdaq: AMAT), which closed up $5.63, or 13 percent, to $46.81; ASM Lithography (Nasdaq: ASML), up $1.13 to $24.63; KLA-Tencor (Nasdaq: KLAC), up $6, or 16 percent, to $43.13; Novellus Systems (Nasdaq: NVLS), up $5.19, or 13 percent, to $43.94; and Varian Semiconductor (Nasdaq: VSEA), up $2.25 to $29.50.
"We believe, at least from a momentum perspective, the worst is known and could be behind us," J.P. Morgan analyst Eric Chen wrote in a research note. Chen added that now could be an attractive entry point for long-term investors.
Most analysts revised their earnings and revenue estimates downwards for the next year, but were optimistic about a turnaround.
"We expect a reversal of AMAT's bookings in the second half of fiscal year 2001," said ABN AMRO analyst Nikolay Tishchenko. The analyst reiterated a "buy" rating Wednesday with a 12-month price target of $60, and added that he sees a 50 percent upside potential for the stock with a 10 percent downside risk from the closing price on Feb. 13.
"Historically, AMAT has never, in our memory, had more than three sequential quarters of down orders, which would suggest that, if history is any guide, the worst should be over by July," said Bear Stearns analyst Robert Maire, who maintained a "buy" rating.
Thomas Weisel Partners LLC analyst Eric M. Ross reiterated "buy" rating and said he sees a "V-shaped recovery" for the stock.
"Lowered near-term expectations do not alter our belief of a sharp V-shaped upturn in calendar 2002," Ross wrote. While the company's guidance confirmed for him that it's not yet at revenue bottom, that doesn't mean the stock hasn't hit bottom yet.
"Begin building positions for the upturn," the analyst advised. "Trying to bottom tick the last 20 percent while risking the potential upside is difficult and unnecessary given the potential upside," he added.
Wells Fargo Van Kasper analyst Susan R. Crossley was more skeptical and maintained a rare "sell" rating along with her price target of $29
"We believe that the semiconductor equipment industry is entering a downturn that should last through 2001, given soft markets for PCs and cell phones and what we believe is gross excess manufacturing capacity added in late 2000," Crossley wrote.
Crossley also went against the grain by saying that valuation analysis suggests that most equipment stocks have more downside risk than one-year upside potential.