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Kathy Panagopouloskathy.panagopoulos@morningstar.com
Chip-Equipment Sector Hasn't Bottomed Yet, Says Morningstar

CHICAGO, Mar 29, 2001 – With almost every chipmaker having already warned of poor earnings this quarter, it's not a stretch to say that the sector's near-term outlook has turned ugly, says Morningstar stock analyst Jeremy Lopez in his article, "The Chip-Equipment Sector Hasn't Bottomed Yet" on Morningstar.com

During the past three months, the Nasdaq has fallen 25 percent, yet chip-equipment shares have edged up 6 percent. This rebound may be short-lived, says Lopez, because chip makers' capital spending has been slashed. 

This year's capital spending for chip manufacturers will be like night and day when compared with last year's industry growth of more than 60 percent, reports Lopez. Based on current budgets, Morningstar expects the top-20 spenders to cut their budgets by at least 15 percent. Because these firms represent 70-80 percent of chip-equipment spending, it's fair to assume this group is a good proxy for the whole industry. 

"This outlook may be dim, but it may get even worse," Lopez says. "The chip industry's biggest rollers, Intel and Samsung, likely will reduce their spending forecasts going forward. With their current capital-expenditure numbers buttressing an already poor forecast, we find it very unlikely these giants will bail out the chip-equipment industry. The question isn't whether or not Intel and Samsung will cut their spending, but rather by how much."

While it's unlikely that either company will make drastic cuts (at least 50 percent), the other chip manufacturers will compound the problem, making it possible for chip-equipment sales to atrophy by roughly 25 percent in 2001, according to Lopez.

With many sources expecting budget cuts, Lopez questions why chip-equipment stocks have held up so well in 2001. 

"At current prices, we think investors should wait for these stocks to get cheaper before making an aggressive move into the sector," Lopez says.

For the complete article, "The Chip-Equipment Sector Hasn't Bottomed Yet," click here.

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¬2001 by Morningstar, Inc. All rights reserved.

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