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Is it too early for the chip equipment rebound?

    Don't expect a revival just yet for the revenue of chip capital equipment vendors, many analysts believe.

    Makers of semiconductor manufacturing equipment have seen their stocks rise during the past several trading sessions. Companies such as Applied Materials (Nasdaq: AMAT), KLA-Tencor (Nasdaq: KLAC), Novellus (Nasdaq: NVLS) and Cabot Microelectronics (Nasdaq: CCMP) have surged since early April, when they hit the bottom of their trading range for the past few months.

    Intel (Nasdaq: INTC) cheered investors further this week, when the company reaffirmed its original capital spending budget for 2001. But a bottom for the industry might not have been reached yet.

    "We are not fans of chasing these stocks, although the fundamentals in the electronics end-markets are beginning to look less negative," Wit Soundview analyst Michael O'Brien wrote in a research note Friday, echoing the sentiments of many of his colleagues. "From our viewpoint, the rebound in capital spending for capacity purchases is still several quarters away."

    Although Intel is not reducing its plans to spend $7.5 billion on capital equipment this year, the company already spent 36 percent of that in the first quarter, Tucker Anthony analyst Gerald Fleming wrote in a research note released Wednesday. Fleming believes Intel has already ordered another 32 percent of its planned 2001 expenditures for delivery in the second quarter, which suggests that second-half spending could plummet.

    And as the world's largest maker of computer processors rapidly plows through its capital budget, the biggest manufacturer of chips for wireless phones is doing the same. Texas Instruments (NYSE: TXN), the leading vendor of digital signal processors, cut its 2001 capital spending to $1.8 billion, with half of that already spent in the first quarter.

    "Together with Motorola, which last week announced plans to cut spending to $750 million from $2.4 billion last year, these announcements appear to mean that the three largest domestic equipment buyers will probably reduce spending by 50 percent to 80 percent in the second half of 2001," Fleming wrote.

    Some analysts believe the worst has already passed. ABN Amro's Nikolai Tischenko, who began coverage of KLA-Tencor this week, and Prudential Securities' Shekhar Pramanick argue that things will gradually improve during the next few months.

    "We believe these could be the worst of the declines and we believe the rate of decline will significantly slow from here," Pramanick wrote. "More importantly, we are seeing the first signs of end-market stabilization (in the PC market). Our proprietary checks also show that in the handset market, things could be incrementally improving for one of the largest handset manufacturers."

    But even those manufacturers aren't so sure.

    In a conference call with analysts earlier this week, KLA-Tencor executives remained cautious and said it is difficult to predict near-term performance. Gateway (NYSE: GTW), which reported quarterly results on Thursday, refused to give a specific forecast beyond predicting profits in the second half of the year.

    "I think all this euphoria over desktops is foolhardy," said A.G. Edwards analyst Brett Miller, who follows computer makers. "People are going to shake their heads a few weeks from now and say 'Why did we buy (PC stocks) on such weak fundamentals?' "

    And on Friday, the third-largest maker of cell phones pointed to more weakness ahead. "No signs of a short-term turnaround," said Kurt Hellstrom, CEO of Ericsson (Nasdaq: ERICY).

    KLA-Tencor and its peers hope that chip makers' moving to copper technlogy, 300 millimeter silicon wafers and chip sizes below 0.18 micron, will fuel an upgrade cycle that will take some of the sting out of the economic downturn. But until sales growth speeds up for chip-using products such as computers and cell phones, makers of semiconductor capital equipment will continue to feel some pain, analysts said.

    "Still too early" for a rebound, wrote CS First Boston analyst John Pitzer. "Neither fundamentals nor valuations warrant an aggressive stance on semiconductor capital equipment stocks in the current environment.">