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THE DAY AHEAD: Trouble in chip land

COMMENTARY--Just when you thought the news from semiconductor companies couldn't get any worse, analysts are predicting that things are about to get even uglier.

In a series of research notes Monday, some of Wall Street's most respected chip analysts raised a few red flags. The Wall Street grumblings didn't ding chip stocks too much (we're becoming accustomed to bad news), but are worth noting.

Here's a look and the odds that these predictions will become reality:

Intel profit warning on deck?

Would another profit warning from chip giant Intel (Nasdaq: INTC) really surprise anybody? Probably not. But another warning would have broad ramifications for the whole sector, especially chip equipment makers--remember that Intel said it would boost capital spending to $7.5 billion despite a downturn.

Many folks didn't buy Intel's capital spending projections a few weeks ago, but investors bought into companies such as Applied Materials (Nasdaq: AMAT), Novellus (Nasdaq: NVLS) and Lam Research (Nasdaq: LRCX) anyway. Applied Materials CEO James Morgan recently indicated that he wasn't counting on Intel's capital spending plans to bring home the bucks. He also noted that you just can't predict the economy.

Now Salomon Smith Barney analyst Jonathan Joseph is predicting that Intel is likely to issue another profit warning and has already cut back on capital spending.

"This is one of those downturns nobody escapes without bruises," said Joseph in a research note Monday. "We expect a wave of new profit warnings and Intel is a prime candidate.

"We have also heard the company has already decided to cut back on its capital spending plan from the previously announced $7.5 billion to somewhere between $5.5 billion to $6.5 billion."

Indeed, Intel has already started cost cutting in other areas. Joseph noted that Intel old-timers, who carry scars from past downturns, think the cutbacks are overdue.

Odds of another Intel warning: High. Intel wouldn't be the first chipmaker to double up on the profit warnings.

Memory meltdown

To no one's surprise, prices for dynamic random access memory (DRAM) have plunged. That means things could get ugly for Micron Technology (NYSE: MU), which is among the world's largest producers of memory chips.

So ugly that Lehman Brothers analyst Dan Niles slashed his fiscal 2001 earnings estimates on Micron from $1.25 a share to 35 cents a share. The First Call consensus estimate is $1.18.

Niles is expecting Micron to report a loss of a nickel a share in the second quarter and a loss of 26 cents a share in the third quarter.

The biggest problem is inventory. "We believe that inventory at the DRAM vendors has increased and that even the lowest-cost DRAM manufacturers will lose money over the next couple quarters," said Niles in a research report.

DRAM spot market pricing has declined more than 35 percent in the past three months and is down 20 percent in the last month. That means Micron's profit margins are going to fall. Prices for flash memory, which rides with demand for wireless devices and networking gear, are also falling fast. Niles also lowered estimates for Cypress Semiconductor (NYSE: CY) because of lower flash memory prices.

Odds of Micron losses: Pretty good. Niles is usually ahead of the pack and many analysts are probably expecting bad things, but won't adjust numbers until the company reports earnings. Micron reports earnings the third week of March.

AMD gains share

Advanced Micro Devices (NYSE: AMD) is likely to take a few lumps because of falling flash memory prices, but at least one analyst said AMD is giving Intel fits and gaining market share.

After a recent trip to Asia, Eric Rothdeutsch, an analyst with Robertson Stephens, concluded that AMD is gaining on Intel.

"One clear area of consensus among the motherboard manufacturers we met with is the demand for AMD-based motherboards," he said. "Demand for Athlon and Duron motherboards appears robust--so robust in fact, that one manufacturer is on allocation for AMD motherboards."

AMD's Athlon and Duron chips are touted as the company's two Intel-killers. According to Rothdeutsch's informal survey, demand for Pentium 4 motherboards are lackluster.

That's some good news for AMD, which forecasted slightly weaker first-quarter sales compared to the fourth quarter. Although AMD is competing well against Intel, the company's exposure to the flash memory problems mentioned above put its earnings at risk.

"The risk to the AMD story continues to be price declines for flash memory," Rothdeutsch said. "Flash comprised 39 percent of fourth-quarter revenues and an even larger percentage of profits."

Odds of another AMD warning: AMD at this point seems to be OK, but no one is immune from this downturn.TDAIN


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