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Street Talk: Stale chips
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November 1, 2000: 11:56 a.m. ET
Analysts downgrade semiconductor stocks, brokerages; raise oil firms
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NEW YORK (CNNfn) - Just when the sun seemed to be shining again on semiconductor stocks, an analyst came along Wednesday morning and rained on their parade -- cutting Xilinx and Altera, the specialty chip makers that fell sharply in early October after other analysts cut their ratings on the stocks. Another analyst hammered the chip-equipment sector.
WR Hambrecht analyst Jim Liang lowered his rating on Xilinx (XLNX: Research, Estimates) to "neutral" from "buy" due to an anticipated inventory correction in the March 2001 quarter for programmable logic device (PLD) chip makers.
Liang reduced his 2001 earnings estimate for Xilinx to $1.28 a share from $1.30 and his 2002 estimate to $1.74 from $1.80. He also reduced his 12-month price target to $75 from $90.
"Our recent check with industry sources in the channel has suggested that, although demand for PLD products in general remains robust, order rates have not increased as rapidly as in previous quarters," Liang wrote in a research note.
For this reason, Liang also lowered his rating on Altera (ALTR: Research, Estimates) to "neutral" from "strong buy," cut his 2001 earnings estimate to $1.51 a share from $1.55, and cut his 12-month price target on the shares to $45 from $75.
Shortly after Hambrecht issued Liang's note, Altera advised that its quarter-to-quarter sales growth in the fourth quarter would be at the low end of its 12-to-15-percent guidance and its October resales were below expectations.
At least Deutsche Banc Alex. Brown came to Altera's defense, reiterating its "strong buy" rating on Altera.
And SG Cowen said that, while Altera's slowing growth is not indicative of "fundamental deterioration," it trimmed its 2001 earnings estimate to $1.48 from $1.53.
Finally, Bear Stearns agreed that the slowdown is not indicative of any fundamental problems, and said it still believes Altera will enjoy "healthy double-digit growth in the December quarter."
Altera shares plunged Wednesday morning by $6.94 to $34, while Xilinx shares were down $3.69 to $68.75.
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Morgan Stanley Dean Witter cut its rating on several companies involved in chip-making equipment and services -- Lam Research (LRCX: Research, Estimates) and Applied Materials (AMAT: Research, Estimates), Advanced Energy (AEIS: Research, Estimates) and KLA-Tencor (KLAC: Research, Estimates) -- to "outperform" from "strong buy."
Morgan Stanley said its ratings changes were due to low capital-spending growth in the chip industry.
"Over the next several quarters, we will likely lower numbers on most of the companies we cover," Morgan Stanley said in a research note.
It said it was lowering its 2000 global semiconductor capital-spending growth rate forecast to a 10- to 15-percent range, down from a prior forecast of more than 30 percent.
"Due to end-market weakness in personal computers and low expectations for telecom equipment spending growth in 2001, combined with concerns over macro-economic growth patterns, chipmakers are becoming increasingly cautious regarding 2001 capital spending plans," the note said.
"Chip industry and macro-economic growth should begin to re-accelerate in 3Q01. Equipment stocks should start to sense it sooner."
In better news for the chip sector, Lehman Brothers said it does not expect No. 1 chip maker Intel (INTC: Research, Estimates) to lower its fourth-quarter earnings guidance on its Webcast scheduled for Wednesday.
"We believe both revenue growth and margins are within the range of guidance given in the third-quarter earnings release and feel comfortable with our estimates for the fourth quarter," analyst Daniel Niles said in a research note.
Niles estimated that Intel will report fourth-quarter earnings per share of 42 cents.
Lehman on health care
Lehman Brothers raised its 12-month price target on shares of health care supplies provider Henry Schein (HSIC: Research, Estimates) to $32 from $28 after it reported strong third-quarter earnings. Lehman raised its 2000 earnings estimate to $1.65 a share from $1.62.
Lehman cut its price target for shares of hospital operator Triad Hospitals (TRIH: Research, Estimates) to $32 from $35, though it raised its 2000 earnings estimate to 26 cents a share from 24 cents.
Lehman said that, although Triad posted stronger results in the third quarter, earnings before interest, taxes, depreciation and amortization fell below its expectations due to bad debt expenses.
Triad has suggested that it may sell off some assets after its merger with Quorum Health (QHGI: Research, Estimates), which Lehman views favorably, as it will reduce risk, the brokerage said.
Triad is comfortable with a fourth-quarter earnings estimate of 9 cents a share, a penny under Lehman's forecast, Lehman said. Lehman's 2001 estimate remains 55 cents a share, it said.
Henry Schein shares were down 25 cents at $24.13, while Triad Hospitals shares were up 38 cents to $28.13.
Beating up brokerages
But then Goldman Sachs gave Lehman Brothers (LEH: Research, Estimates) a taste of its own medicine, cutting its fourth-quarter 2000 earnings estimate for the brokerage to $1.20 a share from $1.36.
Goldman also cut its fourth-quarter earnings estimate for Morgan Stanley Dean Witter (MWD: Research, Estimates) to $1.20 a share from $1.31.
Goldman also cut its fourth-quarter earnings estimate for Merrill Lynch (MER: Research, Estimates) to 80 cents a share from 86 cents.
Salomon Smith Barney followed suit, cutting its fourth-quarter estimates for Morgan Stanley, Lehman and Goldman Sachs. It cut Morgan Stanley's estimate to $1.42 a share from $1.55, Lehman's to $1.31 a share from $1.38, and Goldman's to $1.35 a share from $1.55.
Morgan Stanley also weighed in on the investment banking sector, saying stock market instability could bring a slowdown in domestic investment banking, but seeing opportunities abroad.
"We're going to get some reality back in the market," John Mack, the company's president, told investors in an Webcast.
"The business has slowed down, especially on the issuing side," he said, referring to the business of helping companies to sell stocks and bonds.
"When you go overseas, you see excitement, for whatever reason, you don't see here," Mack said. China and Europe are fertile grounds for underwriting activities, and Morgan Stanley is pursuing more initial public offerings for Chinese technology companies, he said.
Cisco Systems
Goldman Sachs was kinder to networking firm Cisco Systems (CSCO: Research, Estimates), saying it expected it to report "strong" first-quarter results and a surge in revenue.
Goldman, which is keeping the company on its recommended list, said it believes revenue growth will again accelerate, which would give the company 11 consecutive quarters of improved sales.
The brokerage said its first quarter revenue estimate of $6.3 billion would equal 10 percent sequential growth and a 62 percent increase from the same quarter last year.
Earnings per share are expected to reach 17 cents, which would raise sales 8 percent sequentially and 43 percent from the year-earlier quarter.
Cisco shares were down 56 cents to $53.31.
WorldCom, AT&T, About.com
Merrill Lynch cut its rating on WorldCom (WCOM: Research, Estimates) to "accumulate" from "neutral" after the telecommunications company announced its split-up plan and warned of future earnings.
Deutsche Banc Alex. Brown initiated coverage of another self-dividing telecommunications company, AT&T (T: Research, Estimates), with a "buy" rating.
Bear Stearns Bear Stearns downgraded About.com (BOUT: Research, Estimates) to "neutral" from "buy" as a result of the Primedia (PRM: Research, Estimates) acquisition, "given our belief that it takes away considerable upside for About.com shareholders by combining the company to an indebted, slow growing, and unprofitable company," the brokerage said.
Bear on cars
Bear Stearns initiated coverage on automaker General Motors (GM: Research, Estimates) with an "attractive" rating and a $72 price target. It said its recommendation was largely based on GM's ownership in Hughes Electronics (GMH: Research, Estimates) and the "possibility for some sort of transaction occurring in the coming months."
Bear Stearns also initiated coverage of Ford Motor (F: Research, Estimates), giving it a "neutral" rating, which it said reflected more on its "cautious macro-economic outlook" than of Bear Stearns' opinion of the company.
Black gold
ABN Amro analyst Eugene Nowak raised his 2000 earnings estimate for oil and natural gas exploration company Amerada Hess (AHC: Research, Estimates) to $10.30 a share from $9.45 based on better-than-expected third-quarter earnings and a strong outlook for fourth-quarter results.
 Nowak wrote in a research note that Amerada Hess Chairman and Chief Executive John Hess and Chief Financial Officer John Schreyer reviewed some of the company's recent accomplishments Tuesday at an investor meeting, namely how the company has successfully restructured operations and paid down debt.
The company also highlighted its initiation of a share repurchase program and acquired interest in several long-lived international oil and gas projects.
Nowak said he recommends purchase of Amerada Hess shares and believes they are undervalued. His 12-month share price target is $75.
Shares of Amerada Hess closed at $62 Tuesday.
Merrill Lynch raised its intermediate-term rating on another oil exploration company, Triton Energy (OIL: Research, Estimates), to "accumulate" from "hold." Merrill has a long-term "buy" rating on the shares.
Merrill noted that Triton shares have fallen 39 percent since peaking on Sept. 11, and said it thought the stock was "way oversold." 
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