Chip Stocks Take Hit on Forecast

A gloomy prognosis for recovery in the semiconductor sector pushed battered chip stocks down even further Monday.

The broad decline in the chips sector was sparked by comments from executives at several semiconductor equipment makers including Applied Materials Inc. and Cymer Inc. who said they are less optimistic that sales and profits will improve this year.

“It will be the second half of 2002 before we see any recovery,” said Robert Akins, chief executive of Cymer, which makes lasers used in chip production.

The announcements came Monday at Semicon West, a trade show in San Francisco for the semiconductor equipment industry. “Everything is down today because of those comments,” said Jonathan Joseph, an analyst with Salomon Smith Barney.

On Monday, all 16 stocks in the Philadelphia semiconductor index declined--and the overall index fell 6%.

The biggest loser was Applied Materials, which develops the machines that make the silicon wafers used to create computer chips. Applied Materials stock plunged $4.41 to $41.95 on Nasdaq.

And over the weekend, Intel Corp., the world’s largest semiconductor maker, slashed prices on some of its mid- and low-level chips for personal computers by as much as 37%. Intel has been involved in a fierce price war with rival Advanced Micro Devices Inc. for the last year and faces a slumping market for personal computer sales.

Intel is expected today to announce that its second-quarter revenue declined. Last week AMD reported that its second-quarter earnings fell 92% from the same quarter last year.

And investors bracing for similar news from Intel drove that company’s stock down $1.06 on Monday, to close at 29.13 on Nasdaq. AMD’s shares fell $1.08 to close at $20 on the New York Stock Exchange.

“Intel is still regarded as a bellwether in the industry, and the price war has pushed their profits down,” said Drew Peck, semiconductor analyst for SG Cowen Securities Corp. “Intel’s troubles are pushing the whole semiconductor industry down.”

The chip industry is suffering from what some analysts have dubbed the Perfect Storm, a confluence of oversupply, dramatically increased production capacity, and, worst of all, depressed demand for everything from cell phones to PCs caused by the sputtering economy.

So semiconductor companies have been idling plants, cutting salaries and firing workers this year as they try to weather this slump. Sales of chip-building tools are forecast to fall as much as 35% this year, after rising 87% to $47.7 billion last year, according to the Semiconductor Equipment and Materials International trade group.

The negative comments at the trade show left investors spooked, despite claims from some that the chip sector was poised to rebound. A survey by the SEMI Capital Equipment Consensus Forecast released at the trade show found that almost 40% of equipment makers expect orders to hit bottom in the final quarter of this year.

But Wall Street remains much more pessimistic, Peck said. “Given the price cuts we’ve been seeing, investors are rightly nervous about what the future holds,” he said.

“When company executives show up at a major trade show and say no recovery is expected till next year, that tends to scare the market,” said Douglas K. Lee, senior semiconductor analyst for Banc of America Securities.

Lee said the 2001 semiconductor slump is much worse than those of 1996 or 1998 in this notoriously cyclical sector.

The slump was spurred in part by the expectation last year of tight supplies for computer chips this year. As a result, manufacturers of computers and other devices that depend on the chips grabbed everything they could find in 2000 and stockpiled them. Semiconductor manufacturers responded by opening several large fabrication plants to meet what was expected to be the highest demand in history.

Instead, the weakening global economy choked demand, excess capacity led to excess production, which drove down prices, and the piles of excess inventory decreased demand still further.

“This is going to be a slow recovery,” Lee said.

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Times wire services were used in compiling this report.