September 13, 2002
Analyst Ratings On SOXX Stocks Need To Be Socked

New rules passed by the SEC this week make it easier for the average investor to figure out what percentage of stocks Wall Street rates as buy, hold, or sell.  Yes, these new rules would have been more helpful to investors 3 years ago, or when fringe researchers questioned why less than 1% of all stocks had sell ratings on them. Nevertheless, the new rules are a step in the right direction.

New Rules Don’t Apply To Chips
Despite Wall Street’s new found objectivity, chip stocks are one area of the marketplace in which the ratings are extremely bullish, and the reasons why do not entirely make sense.

Of the 17 companies listed in the Philadelphia Semiconductor index (SOXX) just over 8% have sell ratings on them. And while in and of itself this total means nothing, when compared to the recent action in earnings estimates the contrast is startling.

SOXX Index ~  Company Earnings Estimates* Sell Hold Buy Advanced Micro Devices Inc. -221%** 6 6 3 Altera Corp. -20% 1 13 6 Applied Materials Inc. -35% 0 8 19 Broadcom Corp -12% 0 10 15 Intel Corp. -15% 0 9 13 KLA-Tencor Corp. -11% 0 9 15 Lattice Semiconductor Co -23% 1 7 2 Linear Technology Corp. -15% 1 10 6 LSI Logic Corp. -8% 9 8 2 Maxim Integrated Products 33% 0 8 7 Micron Technology -76% 1 6 10 Motorola Inc. 4% 2 9 14 National Semiconductor -63% 2 6 6 Novellus Systems -54% 0 8 14 Teradyne Inc. -107%** 1 9 9 Texas Instruments -6% 2 7 12 Xilinx, Inc. 21% 1 12 7

*Represents the percentage decline in next years fiscal earnings estimates over the last 90-days. ** Earnings estimates have gone from being positive to negative.

The average SOXX stock earnings estimates for next year has declined by 35% over the last 3 months.  As such, the oddness of the SOXX situation is that the analysts who are slashing earnings estimates are not likewise slashing their ratings. Rather, some analysts have lowered their ratings from ‘strong buy’ to ‘buy’ and to ‘hold’ – the ‘sells’ ratings have been rare.

When considering that Wall Street was wrong about the ‘turnaround in tech spending in 2002’ is it not possible they will also be wrong about the ‘turnaround in tech spending in 2003’?  Yes, one day those who endlessly forecast a turnaround in spending will be right – but for some semiconductor stocks that day may never come. 

Pitiful Outlook for AMD
Most Wall Street analysts see AMD losing money for the rest of this year (Dec 02) and next year as well. And while 6 analysts rate AMD a sell, up from only 1 three months ago, 3 are still clinging to ‘buys’ (1 strong buy). 

If AMD replicates its performance of last 4 quarters in the coming 6 quarters the net decline in free cash would be close to $600 million. To be blunt, if you take $600 million out of AMD’s current assets and knock inventories down a notch the companies debt situation turns into default.

Point being, those analysts that rate AMD a buy probably do so because they are paid off or they think they are clairvoyant.  At minimum, companies that could face liquidity problems if current industry trends hold (no up or downtrend) should not be called ‘buys’. 


No one at FallStreet.com has an investment position in AMD.

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