Merrill Slashes ‘09 Semi Cap Outlook; Downgrades KLAC, LRCX, MKSI, PLAB; Cuts Ests On Many Equipment Stocks

Merrill Lynch semiconductor equipment analyst Brett Hodess this morning chopped his forecast on 2009 chip industry cap ex spending to a decline of 6% from growth of 9%, and writes in a research note that “there is further downside risk due to economic and fab capacity data.”

Hodess had previously been expected a 30% sequential rise in orders in the fourth quarter, after a 10%-20% third quarter decline. But with weakening electronics demand, continued memory sector oversupply and growing credit problems for some chip makers, he now thinks the year-end order increase will be much smaller - and that it will give way to a decline in the 2009 first half. Ergo, he says any year-end rally in the group “could be short lived.”

Hodess says valuations in the group have tested the post-bubble lows of late 2001 and early 2002. But he says in that period, demand was near a bottom - but now, “economic data indicates that semiconductor unit demand may only be entering its weaker period now.” He thinks the combination of plentiful fab capacity and slowing demand could keep pressure on semi capital spending longer, and drive valuations down another 10%-20% toward levels seen int he 1998 Asian financial crisis.

In response, Hodess has cut his ratings on both KLA Tencor (KLAC) and Lam Research (LRCX) to Neutral from Buy. He’s also cut MKS Instruments (MKSI) and Photronics Inc. (PLAB) to Underperform from Neutral. His price targets drop to $37 from $46 on KLAC; to $36 from $40 on LRCX; and to $3.25 from $6 on PLAB. He also cut his target on Neutral-rated Applied Materials (AMAT) to $18 from $21. And he cut targets on Teradyne (TER), to $10, from $11; Entergis (ENTG), to $6 from $7; and Kulicke & Soffa (KLIC) to $6, from $7.

Hodess cut earnings estimate for KLAC, LRCX, MKSI, PLAB, TER, Advanced Energy (AEIS), ATMI (ATMI), Cymer (CYMI) and ENTG.

Yesterday: KLAC, VSEA: Credit Suisse Downgrades, Cuts Estimates