The Ratings Game: That chip-equipment rebound might take longer than expected, Morgan Stanley warns

Recent commentary from Lam Research Corp. and KLA-Tencor Corp. has quelled some concerns about the near-term outlook for the semiconductor-equipment industry, but the team at Morgan Stanley isn’t quite convinced.

Analysts there downgraded the chip-equipment industry to in-line from attractive on Thursday, and lowered their rating on Applied Materials Inc. to equal-weight from overweight.

Shares of Applied Materials AMAT, -2.10%  are off 2.4% in Thursday morning trading. Lam LRCX, -3.46%  shares are down 3.1%, while KLA-Tencor KLAC, -2.18%  shares are down 0.7%, while the S&P 500 SPX, -0.71%  is up 0.2%.

“We see equipment stocks as more range-bound for the next six to 12 months, with limited downside but also limited upside, reflecting our more cautious view of memory and memory capital spending,” Morgan Stanley analyst Joseph Moore wrote. “Our more conservative outlook on memory makes it hard to feel conviction in the rapid rebound that companies are calling for.”

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Moore views the first quarter of 2018 as having been the peak for wafer fab equipment, and he projects a decline of roughly 10% in 2019.

As for Applied Materials, which reports results on Aug. 16, Moore expects that management will discuss a similar forecast to the ones Lam and KLA-Tencor executives spoke about in recent weeks. In particular, that means a rockier short-term outlook but optimism that things will start getting better after a few months. Back in July, Lam Research’s chief executive officer said he expected the September quarter to be the “low point” of the year, a forecast that prompted a rally in chip-equipment stocks.

Moore is less optimistic. “The certainty of the equipment vendors seems much higher than the conviction of the spenders, which concerns us,” he wrote. Moore said that Samsung Electronics Co. Ltd. 005930, -3.20%  has yet to finalize its spending plans for the year, while Western Digital Corp. WDC, -2.00%  lowered its spending. Reports of Samsung’s so-called push-outs, or delays of equipment purchases, have pressured the semiconductor-equipment names over the past few months.

That said, he still sees some positives for the industry, including the strong memory cash flows, the potential for acceleration in services revenue, and China’s interest in building a “sovereign semiconductor business.”

Moore maintained his overweight rating on Lam’s stock, though he expects the company’s fundamentals will remain similar to those of Applied Materials.

“Our more cautious rating on Applied is more of a preference to not be blanket overweight the whole semiconductor equipment group,” he wrote.

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