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Analyst reports: Industry downturn hits programmable chip giant

Wall Street is no longer smiling on the semiconductor industry, particularly No. 1 programmable chipmaker Xilinx.

Wall Street is no longer smiling on the semiconductor industry, particularly No. 1 programmable chipmaker Xilinx.

Xilinx management updated analysts Monday on performance for the fiscal third quarter, lowering estimates for sequential revenue growth to about 5 percent from 12 percent previously. Executives blamed the shortfall on a slowdown in bookings in November from large North American customers, but they emphasized that bookings from Europe, Japan and Southeast Asia remain on track for the quarter, which ends in December.

The San Jose, Calif.-based semiconductor company--which uses contractors for manufacturing--is the world's largest maker of programmable semiconductors. It produces logic devices such as field programmable gate arrays, complex programmable logic devices, software design tools, logic cores, and field engineering support for the communications and data processing markets.

A raft of analysts bashed the stock in research notes issued Tuesday morning. Although few analysts downgraded the stock, those who maintained "buy" ratings slashed target prices and revenue estimates based on the warning and a broader slowdown in the semiconductor sector.

One of the first signs of a widely anticipated slowdown came Nov. 29, when Altera warned that fourth-quarter revenue will be flat, with $395 million generated in the third quarter. The San Jose, Calif.-based semiconductor company previously forecast revenue growth of 12 percent.

On Monday, the Semiconductor Industry Association announced that worldwide sales of semiconductors had reached record levels, but the rate of sales growth was dropping.

The trade group said October sales increased 39 percent from October of last year to a record $18.66 billion. In September, sales increased 45 percent from the same period a year earlier, and year-over-year sales growth was 53 percent in August. Month-over-month sales just barely improved, with October 2000 sales inching up only 1.3 percent from $18.42 billion in September--the lowest increase of the year.

Gerard Klauer Mattison analyst John M. Geraghty reiterated a "buy" rating but cut his 12-month price target to $65 from $105. Analyst Bradley L. Mook at PMG Capital maintained a "buy" rating but slashed his 12-month price target to $77 from $94 per share. Analyst David Wu at ABN AMRO maintained his "buy" rating but cut his 12-month price target to $60 from $70 per share.

Xilinx stock fell 12 percent to $36.75 in after-hours trading Monday, after executives issued their warning. But the euphoric stock market lifted Xilinx shares to $42.81 in midday trading Tuesday, up 2.7 percent from its closing price Monday.

WR Hambrecht analysts Jim Liang and Heather Vane reduced their revenue and earnings-per-share estimates for fiscal 2001 to $1.74 billion and $1.22 per share, from $1.77 billion and $1.26 per share. The duo maintained a "neutral" rating.

"We believe the inventory correction we called starting to occur, as evidenced by pre-announcements from both Altera and Xilinx," Liang and Vane wrote in a research note issued Tuesday. "We believe Xilinx's current share valuation has, to a large extent, discounted the downside of an inventory correction. However, we do not see any near-term positive catalyst for the shares, and we therefore maintain our 'neutral' rating."

Merrill Lynch analyst Christopher Danely speculated an inventory correction will last at least two quarters, given lower-than-expected fourth-quarter demand and "the questions on the economy." But the analyst rated the stock "accumulate" because it is at or near its bottom.

"We believe the company has now set the bar low enough that unless the economy and semiconductor market completely collapse, the company should be able to meet or exceed estimates going forward," Danely wrote in a research note issued Tuesday. "However, we believe several other pre-announcements will follow as the inventory build extends across the communications landscape, and think the stock will mark time near term until the company gains more visibility."

UBS Warburg analysts Gregory Mischou and Kelley Yukich reiterated their "buy" rating on Xilinx but lowered their earnings-per-share estimates for fiscal 2001 to $1.24 from $1.30. They also lowered their estimates for fiscal 2001 to $1.59 from $1.80 per share, and they slashed their 12-month target price to $52 from $80 per share.

"Due to the weaker-than-expected results now anticipated in North America, management expects to exit the quarter with inventory days at the high end of the 150-180 day range it targeted earlier in the quarter," Mischou and Yukich wrote in a research note issued Tuesday morning. "We continue to look cautiously toward (the first quarter of 2001) as the extent of the component inventory issue remains unclear. Overall, we believe that long-term fundamentals continue to look positive for Xilinx and we expect to see continued strong results for the Virtex and Spartan II product families."