Applied order news ignites gear stocks

Electronic News, Nov 25, 1996 by Carol Haber

Santa Clara, Calif.--Applied Materials reported its arguably "worst quarter," but comments by executives that orders may have "bottomed out" triggered a surge in the company's shares as well as those of a number of other semiconductor equipment firms.

The remarks also unleashed a burst of enthusiasm that the crippling semiconductor equipment slowdown may be on the wane.

Applied reported new orders for the quarter were $683.2 million during 4Q96, down 42.9 percent from $1.2 billion in 4Q95 and down from $931.3 million in 3Q96.

But Applied also suggested that orders were beginning to flatten.

Lam Research, Tencor Instruments, Novellus Systems and KLA Instruments, among others, all saw their share prices leap at positive remarks by the world's largest chip-equipment maker.

At Friday night's Nasdaq close, Applied's shares had reached 38-5/8, up 6-5/8 as 25,900,000 shares traded; Lam's shares had jumped to 34-1/16, up 4-9/16 on trading of 6,100,000 shares; Tencor saw its shares hit 27, up 5-3/4 as 6,100,000 shares traded; KLA shares hit 38- 1/2, up 5- 1/4 as 7,500,000 shares traded; and Novellus reached 59-3/4, up 9-49/64 on trading of 4,600,000 shares.

Brett Hodess of Montgomery Securities raised his rating on the company from "hold" to "buy." Alex. Brown & Sons reportedly hiked Applied, Novellus, Tencor and KLA to "buy" from "neutral." PaineWebber and UBS Securities were also said to have raised Applied's rating to "buy" from "neutral."

Said Mr. Hodess of Montgomery: "It looks like the orders are bottoming out. This is about two quarters earlier than we thought. A lot of the bad news has been out for the company and we don't think it will get any worse. Orders may be going up slightly from the quarter just ended." Mr. Hodess said Applied usually trades very much in tandem with its order pattern. Its stock price usually reflects the direction of its orders with a six-month lead. "So with the orders flattening out now, it's reasonable that an order upturn could come in the next six to nine months," Mr. Hodess said.

At a phone conference with analysts, Applied had added there was still excess capacity in the DRAM market as well as in the foundry market, but its current order rate is believed to already reflect those factors.

"The worst news is out," Mr. Hodess said. "We have just seen the worst quarter."

But this enthusiasm may be misplaced, according to Clark Fuhs of research firm Dataquest.

Mr. Fuhs acknowledged an emphasis on the positive by Applied management as they predicted the slowdown in the equipment market will continue into 1997 but gave guidance that orders in the next quarter would be in the $725-$750 million range and sales would be approximately $800 million.

"The primary focus being placed on the call by the investment community is the fact that orders will be up sequentially from the previous quarter; and Applied's announcement of a $117 million order from Hyundai (see related story, this page) for its DRAM fab in Oregon has been interpreted by some that the rebound is under way," he noted.

But Mr. Fuhs described the order rate increase from $683 million to the $725-$750 million level "noise level" movement in this industry and urged caution be placed on reading too much into the increase. "Furthermore, the $117 million order from Hyundai does not reflect a return to capacity buys in our opinion. In a recent set of visits to companies, the consensus was that any orders received today are 'strategic' buys. In the case of Hyundai, Samsung and TSMC, orders for equipment for U.S. production are seen as strategic for the company's long-term success in the market...There is a recent announcement by Samsung that capital spending will decline 19 percent in 1997 overall" and spending in Korea may be cut even deeper than that, he said in a report.

Mr. Fuhs also pointed out that SEMI's book to bill for October came in at 0.75. While the ratio is up modestly from the 0.70 reported for September, the bookings continued to decline in October, Mr. Fuhs noted.

In addition, the improvement in the semiconductor book to bill is seen as one primarily driven by the Christmas seasonal buying of components for the PC market. "It remains to be seen what the end use demand will actually be and the effect on the channel flow of orders for components come January," Mr. Fuhs said, adding that Intel's good fortune reflects its own unique position in the market. Capital spending for MPUs only represents 10-12 percent of the market on the average, he added.

But the investment community wasn't alone in its delight.

At least one other equipment company--albeit one not particularly hurt by the slowdown--also commented on signs of life on the equipment scene. Mitch Tyson, president, PRI Automation, commented: "We have seen signs that the slowdown is not getting any worse, judging from our talks with customers and other semiconductor equipment companies. Push-outs have stopped and plans for expansion are beginning to firm up. We are looking forward to the recovery coming sometime in mid-1997."