Novellus leads chip-equipment stocks higher

Novellus Systems shares stormed up $5.94, or 15 percent, to $44.69 Wednesday after it topped analysts' estimates in its fourth quarter. Other chip-equipment stocks joined the rally.

Novellus Systems (Nasdaq: NVLS) posted a pro forma profit of $104.4 million, or 76 cents a share, on sales of $425.1 million.

First Call Corp. consensus pegged the semiconductor-equipment maker for a profit of 70 cents a share on sales of around $415 million.

The $425.1 million in sales marks a 122 percent improvement from the year-ago quarter when it earned $33 million, or 27 cents a share, on sales of $191.7 million.

For the fiscal year, it earned $322.8 million, or $2.39 a share, on sales of $1.38 billion compared to a profit of $76.6 million, or 64 cents a share, on sales of $592.7 million in fiscal 1999.

Company officials said major customer wins, particularly for copper and 300mm equipment, were responsible for the upside results this quarter.

On Wednesday, ABN AMRO ugraded the stock from an "add" rating to a "buy."

Robertson Stephens analyst Sue Billat reiterated her "strong buy" recommendation, saying "with its strong position in copper and 300 mm based CVD tools, we expect Novellus to outperform the rest of the equipment sector."

Among other chip-equipment stocks gaining ground Wednesday, Applied Materials (Nasdaq: AMAT) picked up $3.50 to $47.94; KLA-Tencor (Nasdaq: KLAC) rose 12 percent to $41.50 and Lam Research (Nasdaq: LRCX) moved up $2.63 to $22.81.

The fourth quarter also marked the first period that Novellus reported earnings under SAB 101, an accounting regulation that requires companies to report sales that are actually received upon shipment and do not include revenue received upon acceptance by customers.

Under SAB 101, Novellus posted a profit of $94.2 million, or 69 cents a share, on sales of $425.1 million.

Under this accounting method, it earned $235.7 million, or $1.75 a share, on sales of $1.17 billion in the fiscal year.

By either set of numbers, it was a surprisingly strong quarter considering the industry wide slow down in PC and microprocessor orders.

And the fourth-quarter sales and earnings would have been even better had another major contract not been postponed until the first quarter of fiscal 2001.

“Novellus is well positioned for growth and will recover faster than the rest of the industry, primarily on the strength of our copper and 300mm products,” CEO Richard Hill said in a conference call.

Hill said bookings in the quarter “came in like a lion and went out like a lamb” as orders slowed in Korea, Taiwan and throughout the U.S.

Gross profit margins in the quarter came at 56.7 percent, the company’s highest level in more than four years.

It exited the quarter with a record $1.15 billion in cash and short-term investments.

Hill told analysts to expect bookings to decline 30 percent to 35 percent from the year-ago period. Bookings for the quarter will come in around $320 million and sales will come in around $478 million.

It now expects to earn 68 cents a share in the quarter, slightly better than the 62 cents a share currently estimated by First Call Corp.

Novellus sees second-quarter bookings flat from the year-ago quarter and then a re-acceleration in the third and fourth quarters.

Order backlog by the end of the quarter was a record $575.7 million with cash and short-term investments of $1.152 billion.

Hill said the company is predicting total bookings of $1.6 billion in the fiscal year.

Novellus and the rest of the chip-equipment sector got even more good news after the bell Tuesday when Intel (Nasdaq: INTC) said it expects to increase its capital spending to $7.5 billion from $6.7 billion. It expects to ramp its production of 0.13-micron process technology and 300 mm process technology.

Last quarter, Novellus earned $85.3 million, or 62 cents a share, on sales of $359.1 million.

Ahead of Tuesday’s earnings report, Merrill Lynch analyst Brett Hodess predicted Novellus would earn 71 cents a share on sales of $415 million.

Hodess wasn’t surprised by the company’s strong fourth-quarter results or its relatively positive outlook.

“I would call the outlook cautiously optimistic,” Hodess said. “They’ve won a number of new customers lately. Revenue and earnings growth will flatten out a bit but it’s not going to be too big of a decline.”

Novellus shares soared up to a 52-week high of $70.25 in March before falling to a low of $24.94 in November.

Fifteen of the 21 analysts following the stock maintain either a “buy” or “strong buy” recommendation.