Three weeks after most analysts said STMicroelectronics NV's outlook on the semiconductor market was too optimistic, Merrill Lynch & Co called Europe's biggest chipmaker a "buy." Analyst Andrew Griffin, who'd cut his forecast on July 16 after ST reported second-quarter earnings, today upgraded ST shares from "neutral." Merrill Lynch also raised its outlook on the global semiconductor industry, saying the worst was over for the decline in growth.
Chip sales may start rising before the end of the year as makers of mobile phones and other digital products work through inventories and production drops. Still, worldwide chip sales may slip 17 percent in 2001, according to Dataquest Inc, a market researcher. Last year, sales rose 33 percent.
"We believe semiconductor growth rates will hit a low point in August, remain low in September, and will then improve," Griffin said in a three-page note. "In other words, we expect the industry to hit bottom very shortly." That's exactly what ST said on July 12, when it surprised investors and analysts by releasing its second-quarter results a week ahead of schedule. CEO Pasquale Pistorio predicted sales would pick up by the end of the year, after falling more in the third quarter, as his customers worked though a backlog of products.
That didn't impress analysts at Dresdner Kleinwort Wasserstein, Goldman Sachs, William de Broe, KBC Securities and Banc of America, who cut their forecasts on ST's future profits the following day. ABN Amro cut ST shares to "hold" from "buy." Griffin lowered his 2001 earnings-per-share estimate last month, telling Bloomberg that ST's numbers or outlook didn't mean the chip cycle would be bottoming out soon.
"I'm currently assuming the third quarter will be the worst, but a better December quarter won't mean the upturn has come," Griffin said at the time. "These results have not made me more bullish on the sector."
His timing was better two months ago when he cut his rating on ST shares to "accumulate" from "buy" on June 13. The next day ST cut its second-quarter sales forecast. On the 18th, Griffin reduced his rating again to "neutral." Griffin has since changed his mind. So has Merrill.
In a two page-note called "Train's back in the station -- climb aboard'' analysts at the US' biggest securities firm have advised clients to invest in chips.
"Although the semiconductor industry continues to struggle with a combination of overcapacity and weak demand, we believe that the worst of the downturn is now behind us," said the note, signed by 12 analysts from the US to Japan.
ST shares have declined 37 percent in the past 12 months.
They've gained 15 percent since the company reported second-quarter earnings. The shares jumped 2.22 euros, or 6 percent, to 39.28 euros.
"We expect a recovery by the end of the year or early next year and, normally, you add about six months before the actual recovery otherwise it may be too late to buy," said Marco Wong, chief investment officer of SGY Asset Management, which invests US$2.5 billion in Asia outside Japan. "We are not too bearish and in the long run, this sector is still a growth sector."
The Philadelphia Semiconductor Index of 16 US chipmakers fell 65 percent between March 2000 and its low on April 4 this year. Since then it has gained 31 percent.
Chipmaker share prices will climb slowly in the next six to 12 months, as the companies stop cutting earnings forecasts and pare costs, Merrill said.
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