Morgan Turns Cautious On Chips, Semi Equipment; Downgrades Many Stocks

Morgan Stanley this morning turned cautious on both the chip stocks and the semiconductor equipment sector, downgrading ratings on many names in the group.

In a research note, Morgan chip analyst Mark Lipacis writes that his EPS estimates, which last spring were 25% above the consensus, are now 5% below the Street. “EPS, gross margins utilization and growth metrics tell us that we are in the final innings of the semi cycle,” he writes. “Peaking fundamentals lead us to shift from mid-cycle to cycle-peak P/E multiples and lower our price targets. On average, our price targets imply 5% upside to stocks. The SOX is up 74% off the bottom but has started to underperform - we expect continued underperformance and are sellers on rallies.”

Lipacis adds that the supply chain has been disciplined on inventories, but that two factors make him more cautious: inventories as measured in dollars are creeping higher, and Taiwan notebook makers saw inventory dollars spike sequentially in Q3, “which raises risk for PC component vendors.”

Lipacis made the following rating changes (note that the list includes a pair of upgrades):

• Intel (INTC) to Equal Weight from Overweight, target to $22, from $25.


• Micron (MU) to Equal Weight from Overweight, target to $8, from $8.75.


• Nvidia (NVDA) to Underweight from Equal Weight, target to $9, from $11.


• ON Semi (ONNN) to Underweight from Equal Weight, target to $6, from $9.


• ARM (ARMH) to Underweight from Equal Weight.


• Altera (ALTR) to Equal Weight from Overweight, target to $21.50, from $26.


• Linear (LLTC) to Overweight from Equal Weight, target remains $30.


• Maxim (MXIM) to Overweight from Equal Weight, target to $20, from $19.


• Xilinx (XLNX) to Equal Weight, from Overweight, target to $24, from $30.

He also cut target prices on Atheros (ATHR), Avago (AVGO), Broadcom (BRCM), Lattice (LSCC), Microchip (MCHP), Marvell (MRVL), National Semi (NSM), PMC-Sierra (PMCS), STMicro (STM), Skyworks (SWKS), and Texas Instruments (TXN).

Meanwhile, Morgan semi equipment analyst Atif Malik downgraded both KLA-Tencor (KLAC) and Novellus (NVLS) to Underweight from Equal Weight, cutting his target prices on those stocks, as well as on Applied Materials (AMAT), Verigy (VRGY) and Lam Research (LRCX).

“We are downgrading the group to Cautious from Attractive as we expect fundamental indicators like chip utilization and equipment orders to peak in [the first half of 2010],” Malik writes in a research note.  Malik notes that the group has rallied 100% off the bottom, outperforming the market by 3-to-1 year to date. “We believe stocks typically start under-performing the market ~6 months in advance of a peak in fundamentals.”

In today’s trading:

• Altera is down 66 cents, or 3.2%, to $19.28.


• ARM is down 15 cents, or 2.1%, to $7.18.


• Intel is down 48 cents, or 2.5%, to $18.54.


• Linear is down 11 cents, or 0.4%, to $25.87.


• Micron is down 24 cents, or 3.7%, to $6.34.


• Maxim is down 12 cents, or 0.7%, to $16.62,


• Nvidia is down 42 cents, or 3.5%, to $11.67.


• ON Semi is down 29 cents, or 4.4%, to $6.38.


• Xilinx is down 65 cents, or 3%, to $21.10.


• KLA-Tencor is down $1.45, or 4.4%, to $31.45.


• Novellus is down $1.12, or 5.4%, to $19.67.