October 9, 2007 – While much of the industry chews over downgraded equipment sales and capex outlooks and anxiously waits the 4Q selling season, now’s the time to start locking in profits on some big-name equipment supplier stocks, according to a financial analyst.
In a research note, Friedman Billings Ramsey analyst Mehdi Hosseini points to the combined effect of a “seasonally weak 1H08” followed by potential inventory buildups (caused by double ordering) that could cause chipmakers to reign in wafer starts, affecting utilization rates and future tool orders. He adds that his firm’s projection of ~3% capex growth in 2008 is well above other Wall Street estimates (and elsewhere — Gartner recently lowered its 2008 capex outlook to -4.4%). Spending in the foundry (+12%) and NAND flash sectors will drive what little capex growth there is, while spending for DRAM is seen plunging 20% and logic will be flat-to-down.
With some stocks near yearly highs — FBR’s “coverage universe” is up 32% year-on-year, vs. an 8% decline in the Philadelphia SOX index, and is up 42% since January vs. 15% for the SOX and 30% for the S&P 500 — Hosseini says the risk/reward for investors right now “is no longer compelling” and urges investors to head to the sidelines for a number of tool vendors, including ASML, KLAC, RTEC, and ASTSF, all downgraded from “Outperform” to “Market Perform.” He predicts many equipment companies will “call a bottom in bookings” in 3Q07, and though foundries will post strong demand and >90% utilization rates, “we expect the bears to finally throw in the towel as their DRAM-based thesis has run out of gas,” he writes.
Hosseini did, though, call out a few safer investments that he characterized as “differentiated” — AMAT (solar/FPD exposure), WFR (poly/solar wafer exposure), TSRA (secular play and diversified revenue) and IMOS (better risk/reward profile).