Altera and Xilinx plunge on downgrades

Altera Corp. (Nasdaq: ALTR) and Xilinx Inc. (Nasdaq: XLNX) crumbled Tuesday on concerns that the market for general purpose semiconductor chips is waning. Salomon Smith Barney and Lehman Brothers both cut their ratings on the stocks Tuesday.

Altera shares were down 9 to 31.88, or 22 percent. Salomon cut Altera to "outperform" from "buy" and lowered its 12-month price target to $60 from $68.

Xilinx shares fell 18.13 to 61, or 23 percent. Salomon downgraded to "outperform" from "buy" and cut its 12-month price target to $100 from $110.

Salomon analyst Clark Westmont said the downgrades of Altera and Xilinx were due to continued deterioration in the environment for general purpose semiconductor chips. With supply generally loosening, Westmont said the overheated environment in first half of year has cooled.

"We believe this limits the amount of earnings upside over the next six to nine months, particularly relative to the high end of expectations," he stated in a report. Westmont also cited the companies' high dependency on their 'turns' business and relatively high exposure to Europe, making them particularly vulnerable to recent changes in market environment.

Lehman cut Altera to "neutral" from "outperform" and lowered 12-month price target to $55 from $75.

Lehman cut Xilinx to neutral from outperform and lowered 12-month price target to $90 from $100.

Lehman said although it expects Altera and Xilinx to report better-than-expected earnings per share in the next quarter, driven by revenue growth, it believes revenue growth rates for the next two quarters are likely to slow noticeably as both end customers and contract manufacturers re-balance inventory and order rates.

Lehman added that near-record margin levels will make future earnings upside dependent on higher revenue growth. The firm believes this is two-quarter problem, such as in mid-1994, as opposed to beginning of next cyclical downturn.

Prudential also downgraded Altera from "strong buy" to "accumulate."