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Semiconductors slammed
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November 30, 2000: 1:20 p.m. ET
Chip stocks under pressure as sales slow, inventory builds up
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NEW YORK (CNNfn) - Semiconductor stocks were sliced Thursday, with much of the bloodletting led by Altera Corp. after it warned of a revenue shortfall in coming quarters.
 Altera, however, is not suffering alone. Chip analysts point to a combination of concerns plaguing the sector, including slower-than-expected sales of companies that use semiconductors in their products as both consumer and corporate clients retreat from spending on new computers and devices.
"The slowdown in the in the wireless and PC markets over the last four months, the uncertainty in wireline forecasts and the hoarding of components resulting in inventory overhang have all combined to create an environment that we believe will result in reduced fourth-quarter and calendar 2001 earnings for all the companies in our universe," Credit Suisse First Boston analyst Tim Mahon said in a research note.
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"One of the above events alone probably wouldn't have caused such a knee-jerk reaction in the device world," Mahon noted. "However, the combination of all has placed a major strain on component inventory levels at several OEM and contract manufacturers."
In afternoon trading, the Philadelphia Stock Exchange's semiconductor index, or SOXX, reflected skittish investors' sell-offs, falling 51.24 to 525.14.
Altera heads hit list
Altera (ALTR: Research, Estimates) fell $3.12, or 12 percent, to $22.81 in midday trading,
 The San Jose, Calf.-based company, which makes computer chips known as programmable logic devices, said revenue should total about $395 million, flat with third-quarter results. Analysts surveyed by earnings tracker First Call had forecast sales of $445.8 million for the October-December period.
It was the chip maker's second warning in just under a month, following an early November announcement that sales of its specialty chips failed to meet expectations in October.
Xilinx gets dragged down
As if Altera's warning weren't enough to scare away investors, Wall Street analysts reacted by downgrading and reducing estimates for several of Altera's semiconductor siblings as well.
Xilinx (XLNX: Research, Estimates), Altera's main rival, sank $4.19, or 9.7 percent, to $38.81, and Lehman analyst Dan Niles said in a research note Thursday that he expects the company also will lower its guidance, possibly Monday.
"The magnitude of earnings per share shortfall though should be less (in the 10 to 20 percent range versus consensus), given its stronger product cycle," Niles said. "We believe Xilinx may have EPS risk from 2 cents to 3 cents in the fourth quarter and 25 cents to 35 cents for calendar 2001 on current First Call consensus."
Niles also warned that because of the lack of visibility, he believes there may be more earnings cuts as the company moves into the March quarter.
CSFB downgrades universe
Credit Suisse First Boston's Tim Mahon believes that specialty chips have hit a wall, prompting him to downgrade a total of 11 chip stocks Thursday.
Mahon reduced the following companies to "buy" ratings from "strong buys":
Lattice Semiconductor (LSCC: Research, Estimates), which fell $1.94, or 11 percent, to $15.62; Xilinx, Fairchild Semiconductor (FCS: Research, Estimates), off $1.94, or 12.6 percent, to $13.44; Intersil (ISIL: Research, Estimates), down $4.75, or 17.8 percent to $21.88; Microschip (MCHP: Research, Estimates), down 69 cents, or 3 percent, to $22.38 and Silicon Storage Technology (SSTI: Research, Estimates), off $1.69, or 12.4 percent, to $11.94.
Mahon also lowered estimates and price targets on Altera; Atmel (ATML: Research, Estimates), down $1.28, or 11.7 percent, to $9.66; Cypress Semiconductor (CY: Research, Estimates), off $4.88, or 20 percent, to $19.25; LSI Logic (LSI: Research, Estimates), and Integrated Circuit Systems (ICST: Research, Estimates), off $1.31, or almost 8 percent, to $15.31.
Lehman, Merrill Lynch flip chips
Merrill Lynch analyst Chris Danely also reduced intermediate ratings on Fairchild and Intersil, to "neutral" from "accumulate."
Danely said Merrill's channel checks indicate a large slowdown in order rates during the first two months of the December quarter for discrete and catalog analog components, which make up 60 percent of Fairchild and Intersil revenues. Danely said that the excesses were caused by an overbuild of components at OEMs, CEMs and distributors.
"We believe the tight supply environment may be unraveling faster than we previously anticipated, which does not bode well for pricing and bookings relative to our previous expectations," Danely said.
"Since Intersil and Fairchild recognize revenues on a sell-in basis, these stocks are particularly vulnerable to decreased bookings. As a result, we believe both companies will be challenged to meet estimates for the fourth quarter and first quarter. Still, our view for 2001 is much more benign than the last downturn," Danely said
Lehman Brothers analyst Arnab Chanda downgraded PMC-Sierra (PMCS: Research, Estimates) to a "neutral" rating from "outperform," based on worries in high inventory levels in contract manufacturing in the wireline communications sector. Shares tumbled $12.75, or 12.3 percent, to $90.75.
Chanda also cut the price target of Vitesse Semiconductor (VTSS: Research, Estimates) to $50 a share, although he kept its "outperform" recommendation and initiated converge of Applied Micro Circuits (AMCC: Research, Estimates), with a "neutral" rating. Shares of Vitesse fell $6.56, or 13.3 percent, to $42.62 and AMCC slid $4.12, or 8 percent, to $46.88.
"We believe that the fundamental environment for communications IC players is deteriorating," Chanda said in a research note. "We do not believe that the December quarter is at risk, although upside is likely to be limited."
Chanda called the March quarter "a major concern," given the lack of clarity and declining order environment and advised that because of the combination of weakening computer demand and inventory buildups, "We would issue caution on the communication IC stocks and believe that it is too early to explore the bottom." 
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