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Analysts: Chip rebound has ways to go

Chip stocks slump after a major investment firm lowers ratings on a slew of stocks, citing poor fundamentals and lofty stock prices.

Chip stocks slumped Tuesday after a major investment firm lowered ratings on a slew of stocks, citing poor fundamentals and lofty stock prices.

Analysts at Credit Suisse First Boston lowered ratings on semiconductor and semiconductor-equipment stocks, and dropped estimates for PC-unit shipments for this year and next year. According to the CNET tech indexes, semiconductor and chip equipment stocks were weak across the board.

The downgrades come at a time when investors are already jittery over chip stocks. Intel and Advanced Micro Devices, two of the leaders in the industry, are apparently engaged in a price war that could become a bloodbath, according to some industry watchers. The fate of semiconductor companies is hotly debated on Wall Street.

"While cyclical trends indicate that the worst may be over, key structural issues--namely weak global economies, persistent overcapacity through 2002 and a reversion back to normal growth rates--still have time before stocks hold a sustained, long-term, rally," semiconductor analyst Charles Glavin wrote in a research note.

He dropped his rating to "hold" from "buy" on Altera, Applied Micro Circuits, Atmel, ChipPac, Cypress Semiconductor, Lattice Semiconductor, LSI Logic, Microchip Technology, Maxim Integrated Products, Silicon Storage Tech and ST Microelectronics.

And things aren't looking much better for the companies that make semiconductor equipment. CSFB's John Pitzer lowered his rating on Applied Materials, Novellus Systems, KLA-Tencor, ASML, Varian Semiconductor, and ATMI from "buy" to "hold"; and dropped the entire sector from "overweight" to "market weight."

"The current downturn is more unlike than like any preceding downturn," said Pitzer. "There are significant structural issues (lack of product drivers, significant financing "bubble") that are overshadowing cyclical trends (inventory, supply)."

Glavin's note contrasts with recent reports from other brokerage firms which have declared that the worst may be over for the sector. Merrill Lynch and Salomon Smith Barney have both raised their ratings on some of these stocks, theorizing that things can't get much worse, and investors should get on board while prices are low.

But Glavin took issue with that notion, stating that demand will remain weak even after companies resolve their inventory issues. He pointed to the downturns of 1991 to 1992 and 1985 to 1986, saying that in those cases, "it took much longer than just three quarters to return to growth."

As for the semiconductor equipment sector, Pitzer estimated that bookings would continue to slump potentially as far out as the March quarter of 2002. A sequential growth in bookings is unlikely until the second half of 2002, and "the beginning of a sustainable recovery is 12 months away," he said.

CSFB also projected more bad news for the PC sector, saying unit shipment estimates for 2001 will decline 6 percent instead of the previous estimate of flat growth. In 2002, unit growth should be only 10 percent, the brokerage firm said, instead of a previous prediction of 17 percent.