FOCUS U.S. chip equipment offers buying opportunities as trough is near

----by MICHAEL TODD PAI----

	    SAN FRANCISCO (AFX) - Buying opportunities in the semiconductor equipment sector will emerge between now and the coming few months as the industry trough is near, analysts said following the release yesterday after market close of the April book-to-bill ratio that showed the lagging indicator hit a 

10-year low.

"We think the best buying opportunities will be now through the next three months," Banc of America Securities analyst Mark FitzGerald said, noting that share prices in the group, "are now reflecting a lot of bad news."

Morgan Stanley analysts agreed the sector is presenting investment opportunities and said their investment thesis remains unchanged after the latest indicator.

"We believe semiconductor equipment stocks should be bought by August," they said. "By then, we expect to have identified the bottom and begin to see inflection points in equipment bookings and book-to-bill ratios, utilisation rates, year-over-year semiconductor growth rates, excess inventory builds, global GDP trends and downward model revisions."

The Morgan Stanley analysts urged investors to "get involved" in the sector before the semiconductor industry hits its growth-rate trough, which they anticipate occuring in August or September.

Equipment stocks are, however, unlikely to post a, "straight-line rise to the moon from current levels," but the downside risk to the segment is limited, according to the Morgan Stanley analysts.

Investors should move into the sector ahead of its turn, "when traditional aggressive-growth players turn to technology and momentum investing takes hold," they said, noting the inflection in year-on-year industry sales growth rates, "usually marks a turn from companies missing EPS estimates and guiding the Street numbers lower."

Morgan Stanley upgraded five large-cap stocks in the segment to 'strong buy' from 'outperform' including Applied Materials Inc, KLA-Tencor Corp, Lam Research Corp, Novellus Systems Inc and Teradyne Inc. The Morgan Stanley analysts also lifted their price target on Applied Materials, KLA-Tencor and Novellus all to 70 usd from 60 usd previously. They maintained a 40-usd price target on Lam Research and a 50-usd target on Teradayne.

Mark FitzGerald at Banc of America anticipates a "sharper" fall in bookings over the next 1-3 months, "tracking the shortfall that has already occurred.

"The largest rate of cancellations appears to have been in (the) months of February and March, so we would still expect the three month average bookings reported in May to continue to decline."

Analysts Brett Hodess and Sameer Dasai at Merril Lynch also anticipate the book-to-bill ratio will "bottom out soon".

"However, orders are likely to remain weak as low utilisation rates are likely to go lower," Hodess and Dasai said, adding they would focus on, "low-valued, strong franchise smaller caps for new money into the group, 

while looking for significant pullbacks before attempting to chase the large caps."

The Merrill Lynch analysts said that valuations "are ahead of themselves for many" stocks in the sector after the run-up following Applied Materials upbeat news.

Among small caps that the Merrill Lynch analysts like, they rate for the intermediate term Photronics Inc a 'buy' and Ultratech Stepper Inc an 'accumulate'.

At Sanford Bernstein, analysts continue to anticipate an order trough in the second quarter, followed by a trough in shipments in the third or fourth quarter.

They are somewhat less bullish on the stock price appreciation outlook for the segment, however, saying the segments recent gains and multiple expansion, "suggests that a summer turn has been fully discounted and strong calendar 2002/2003 growth is needed to justify additional upside."

They rate the segment 'outperform', "predicated on a twelve-plus month time horizon as stocks must grow into future earnings from the 2002 cycle upturn."

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