Nothing like the combination of an upbeat report and upbeat expectations to buck a marketwide trend.
Novellus Systems (Nasdaq: NVLS) tore past analyst forecasts in its third quarter report yesterday, Intel is expected to at least edge out estimates when it releases its results today, and between the two there's enough positive momentum to carry the chip sector above the water despite a drop for the overall market.
The Philadelphia Semiconductor Index was up as much as 18 points this morning before sagging after lunch. But even in the afternoon it remained above the rest of the sagging tech sector.
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Capital equipment makers such as Novellus provide a window into the true strength of the sector. Given that demand for Novellus' machines (which drop layers of semiconductor material onto the chip base) rose throughout the September period -- "A Yahoo-like quarter," analyst David Wu said of Novellus -- you can safely conclude that the chip industry continues to rebound from its depression of previous year and a half.
You truly know the industry is healthy when the major driver of Novellus' business comes from pure supply and demand issues, as opposed to excitement over up-and-coming technology. "Capacity was the major motivator in this quarter," Novellus CEO Richard Hill said during yesterday's conference call with analysts. "What we see is a rebound in the capacity for 0.18 micron."
That will translate into strong growth for Novellus, believes Robertson Stephens analyst Susan Billat, who reiterated a "strong buy" rating on Novellus and raised her 1999 earnings estimate to $1.75 from $1.60 per share. "Given the tight chip-making capacity that we see, we anticipate 10 percent or better order growth for Novellus in the fourth quarter and expect demand for shorter lead times will drive 13 percent or better revenue growth in the December quarter," Billat writes in a research note released this morning.
Merrill Lynch analyst Mark Fitzgerald also raised his 1999 earnings forecast, to $1.72 per share on salesof $573 million, compared to his previous prediction of $1.59 per share on $548 million revenue. Fitzgerald also boosted his 2000 profit estimate slightly to $3.35 per share on revenue of $845 million, from $3.34 and sales of $828 million. "Design wins over the next six months will translate into meaningful revenue growth in the second half of 2000," writes Fitzgerald, whose price target is $100. "NVLS is our favorite name in the group."
Demand for cutting edge technology does help. Eight customers have said they're moving to copper chips, with three expected to be in full production by year's end, Hill said. IBM recently announced it shipped more than 1 million chips for Apple's G4 computers; Big Blue used Novellus' Sabre systems to make those. Novellus executives on yesterday's call declined to be more specific about expectations for their copper electrofill business, but Hill said it was "conceivable" that copper could generate 20 percent of the company's business.
Even Taiwan's earthquake may help the capital equipment sector a little in the near term. "To my knowledge every single one of our systems are up and running," Hill said. "I think the implication is that we should see, in the short term, a potential for increases in orders, as they try to overcome backlog that's been created due to the shortage of production. And we'll do everything we can to help them do that."
This afternoon we'll hear about the chip industry's product end, in the form of reports from Intel and Motorola. If they top the analyst numbers as expected, chip investors ought to be smiling for a long time.
She still likes Broadvision, and actually raised her 12-to-18-month price target to $200 from $150 (a figure that was just set three weeks ago).
Enterprise software deals don't close until the final weeks of a quarter, but that doesn't exculpate vendors. Publicly-held companies have a responsibility to guide analysts; it's up to the Neons and Oracles to temper expectations and push analysts to conservatism. 22GO>