Investors in the chip industry ought to be encouraged by PaineWebber's newest analyst.
Tim Summers yesterday formally began coverage of the semiconductor capital equipment industry. Or rather, formally resumed his coverage, since he did the same thing at Advest before coming to PaineWebber.
A newer and bigger employer didn't change Summers' mind, as far as companies worth watching. PaineWebber now has "buy" ratings on six makers of chip manufacturing equipment, and an "attractive" on a seventh. Summers basically had the same opinions on the same stocks at Advest, which could explain why most of the stocks mentioned yesterday didn't move at all.
After all, the brokerage firm may be new (and prominent), but the analyst has done this before. His opinions aren't new.
Or maybe some of them are. During a telephone interview yesterday afternoon, Summers said he believes large capital equipment OEMs such as Applied Materials (Nasdaq: AMAT) and Novellus (Nasdaq: NVLS) might be low-balling their estimates for the second half of this year.
The analyst's belief stems not from the big names, but instead from his coverage universe's smaller names. "We're still hearing very bullish comments from the component suppliers," Summers said. "They're more bullish than the OEMs."
Less well-known suppliers in Summer's purview include Advanced Energy Industries (Nasdaq: AEIS), Applied Science and Technology (Nasdaq: ASTX), ATMI (Nasdaq: ATMI), Helix Technology (Nasdaq: HELX) and MKS Instruments (Nasdaq: MKSI).
In fact, it wasn't AMAT or NVLS that got a boost from Summers' report, but rather Applied Science and Technology, whose equipment produces gases used to deposit and etch layers of material in the chip-making process. ASTX shares rose 8.5 percent yesterday and more than 10 percent so far today.
Recent history suggests ASTX stock has been affected by technical trading issues, more than anything else. A 6-month chart shows how ASTX's performance mirrored the Nasdaq almost perfectly from March through June. Positive comments in one week of April -- when Robertson Stephens, Adams, Harkness & Hill and CIBC World Markets began coverage -- could break the stock out of its lockstep. Even a mid-July preannouncement of better-than-expected quarterly results failed to produce more than temporary relief amid a month-long slide.
Perhaps it needed the backing from one of Wall Street's giant names -- PaineWebber certainly qualifies -- to lure the market back. And the price decline itself made ASTX more palatable.
"It's the cheapest stock in the group on a P-E basis, so I think there some money flowing back into the stock today," Summers said.
Not only is it cheap, but it's cheap in a sector expected to remain strong for several quarters. Summers does believe industry expansion in 2001 will be less than half of what he estimates for this year, but his 2000 forecast calls for an almost-outrageous growth rate of 70 percent. No capital-intensive industry can maintain that growth rate for a long period, so some fall-off ought to be expected.
"Just because the growth is slowing (next year) doesn't mean that stocks should peak or decline," Summers said.
Summers sees 2001 industry at 30 percent, which is still extremely robust by historical standards. And most capital equipment makers remain far below their highs from earlier this year. Applied Science and Technology, even after this week's gains, remains about 50 percent below its level in early March.
If Summers is right about the rest of this year, not only the small players but the big names everyone knows (Applied Materials and Novellus) might do better than expected. "I think there could be some room for (OEM) upside in the second half," Summers said.
Which could mean a better-than-expected market for the rest of tech industry. 22GO>