Applied Materials (AMAT)

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LOL: Goldman Turns Bullish On Semi Cap Equipment; Upgrades Applied Materials; Downgrades Intel On Margin Concerns

Posted by Eric Savitz

Goldman Sachs analyst James Covello this morning upgraded his rating on the semiconductor capital equipment sector to Attractive from Neutral.

He asserted that the three rules he uses to upgrade cyclical stocks have been met:

Trough margins.

Management capitulation.

Signs of life on the horizon that fundamentals are poised to improve.

“With the stocks having taken another leg down over the last several months we now feel comfortable getting aggressive on the group as investors are getting paid to wait for the order upturn that we expect in [the 2009 second half],” he writes. Covello says Q3 results and Q4 guidance will be weak as memory orders have “essentially ceased.” But he says investor expectations have been “appropriately set,” and he thins the Q3 earnings season should be the last round of significant earnings estimate cuts this cycle. Covello, in fact, today is cutting estimates for the semi cap companies across the board to reflect the weak macro environment.

In connection with the sector call, Covello today raised his rating on Applied Materials (AMAT) to Buy from Sell on a valuation basis; the stock was also added to Goldman’s Conviction Buy List. He says the stock has become too cheap to ignore, trading at about 15x normalized EPS versus 21x at the beginning of 2008.

On the other hand, Covello is cutting his rating on Intel (INTC) to Neutral from Buy, asserting that “the company’s margins have already peaked for the cycle.” He says that “given the high historical correlation between margins and share price for deep cyclicals like Intel, we believe that now is the time to get incrementally cautious on the stock, ahead of the margin headwinds” he expects in the 2009 first half.

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Are people still listening to these overpaid cretins in investment banking?!

Comment by Enver - October 20, 2008 at 8:11 am
All of the sudden Goldman noticed there is price pressure for Intel products, I don’t buy this deep cycle argument, there has been price pressure for a long time, at least that is what AMD and others have been saying since I don’t know when. This is another Goldman’s strategy to serve their own interest, just like when they claim that the price of oil was going to the Moon. Intel had very good results, in my opinion they are in the best position to benefit from the recovery next year, at this levels Intel is undervalue.

Comment by BLAS - October 20, 2008 at 8:15 am