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Chip Stocks Fall as Analysts Debate Strength


Some high-profile semiconductor stock analysts are in a heated battle over whether it's time to jump into the depressed shares.

The latest to weigh in: Morgan Stanley's Mark Edelstone, who on Monday told clients to stay away from the sector--spurring a sell-off in most of the stocks.

Edelstone said last week's 23% surge in the closely watched SOX chip stock index probably won't last.

Chip shares, which rallied from their lowest levels in almost two years, are still expensive given the disappointing earnings reports expected in coming days and given the continuing slowdown in demand for chips, he said.

"I think we'll end up with most of these stocks going back down and challenging their lows over the next quarter," Edelstone said in an interview. "It's definitely very difficult out there and I don't think it will get much better until the end of the third quarter."

Edelstone's comments put him at odds with Salomon Smith Barney's Jonathan Joseph, who last week recommended investors boost their holdings of stocks such as Intel and Texas Instruments.

Last July, Joseph correctly predicted that semiconductor shares were headed for a plunge. So some investors last week bet that his new "buy" recommendations also would turn out to be timely.

But Edelstone, ranked No. 1 last year among chip analysts by money managers in Institutional Investor magazine's annual survey, on Monday cut his 2001 and 2002 earnings estimates on Intel, the biggest semiconductor company, and reduced his ratings on Xilinx, Broadcom and Lattice Semiconductor.

Intel (ticker symbol: INTC) fell $1.82 to $26.30 on Monday. The stock on April 4 closed at $22.63, the lowest since November 1998.

Xilinx (XLNX) lost 90 cents to $40.24 on Monday, while Broadcom (BRCM) slid $4.27 to $31.11 and Lattice (LSCC) eased 78 cents to $21.12.

The SOX index fell 3.5% to 576.73, its first decline in four sessions.

Two weeks ago, stocks such as Intel and Broadcom were pricing in "a lot of bad news," Edelstone said. But with the rebound in the shares, prices reflect an unduly optimistic outlook, he said.

"Historically, these stocks have a hard time sustaining advances while year-over-year revenue is declining and while negative earnings surprises are quite high," which should be true well into the third quarter, he said.

Edelstone joins other top-rated analysts in questioning the staying power of the recent semiconductor rally. Lehman Bros. analyst Daniel Niles and Joseph Osha of Merrill Lynch & Co. last week published reports critical of chip makers' prospects in coming months.

Edelstone predicts that chip company earnings won't rebound even as customers' inventories dwindle and demand picks up late in the year. "The other shoe to drop is pricing," he said, as makers of commodity-type chips, which represent two-thirds of the market, will face falling prices for their products through 2002.

Edelstone cut his 2001 earnings per share estimate for Intel to 45 cents from 60 cents and his 2002 forecast to 60 cents from 80 cents. Intel will "become more aggressive" in cutting prices on its Pentium 4 chip to spur demand for personal computers, Edelstone said. That will cut the firm's gross profit margin, he said.

The analyst lowered his estimate for Xilinx's 2001 earnings to $1.14 a share from $1.15, and 2002 estimates to 80 cents from $1.10. He cut his target price on the stock to $60 from $70 and his rating from "strong buy" to "outperform."

For Broadcom, Edelstone lowered his 2001 earnings estimate to 10 cents a share from 55 cents, and his 2002 estimate to 60 cents from $1.40. He slashed his target price to $60 from $130 and his rating to "outperform" from "strong buy," based on "expectations for a potential loss in the second quarter" and the possibility the company will be forced to drop product lines.

Edelstone lowered his 2001 estimate for Lattice to 90 cents a share from $1.05 and 2002 estimate to $1.05 from $1.30.

Ticker Talk: Hurt by California's power crisis and a tough quarter for retailers, a record number of U.S. companies--23--had their bonds downgraded to "junk" from investment grade in the first quarter, Moody's Investors Service said. The list includes PG&E, Saks, J.C. Penney and Hasbro.


Still Too Expensive?

Many semiconductor stocks still are priced at relatively high levels compared with expected 2001 earnings per share. That reflects investors' belief that earnings will rebound strongly in 2002, Wall Street bulls say. Here's a sampling of chip stocks, analysts' consensus estimate for 2001 earnings per share (EPS) and the stocks' price-to-earnings ratios (P/E) based on the 2001 estimate.


Ticker Mon. close Est. 2001 Est. Stock symbol and change EPS P/E PMC-Sierra PMCS $26.90, -$0.72 $0.20 135 Broadcom BRCM 31.11, -4.27 0.37 84 LSI Logic LSI 17.68, -0.86 0.22 80 Micron Tech. MU 44.50, -1.91 0.72 62 Globespan GSPN 19.36, -3.03 0.41 47 Vitesse Semi. VTSS 24.05, -1.65 0.51 47 Texas Instrum. TXN 33.01, -2.44 0.82 40 Cypress Semi. CY 17.66, -0.95 0.45 39 Intel INTC 26.30, -1.82 0.67 39 Advanced Micro AMD 23.50, -1.35 1.59 15


Sources: Bloomberg News, IBES International, Times research

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