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Intel Corporation Message Board

  • semi_equip_junkie semi_equip_junkie Mar 16, 2013 12:22 AM Flag

    Covello - the chip equipment "analyst"

    9 years ago Covello slammed chip equipment stocks - he created a certain perception and it took a long, long time to overcome it. This blurb is almost 9 years old - ....can you see similarities - he's trying to kill Intel foundry business off before it happens,

    "Regarding Covello: It seems that he is trying to kill off the semi equipment recovery before it has even happened!

    Covello's new view on the industry is based on how cyclical stocks trade, as compared with cyclical growth stocks, and a calculation that margins on earnings before income taxes, depreciation and amortization are declining over time for the chip-equipment industry.

    "We not only believe that the semiconductor-equipment industry is a pure cyclical, but we also believe that the stocks are trading as such as the market is beginning to acknowledge these long-term negative secular trends."

    Based on this, he used normalized levels of cash flow as an indicator for stock peaks. When Applied Materials, the equipment industry's largest player, reports financial results Feb. 18, EBITDA margins should reach a cycle-average of 18 percent, Covello predicted.

    "When an investor owns a stock, he or she owns the future stream of cash flows that the stock provides. Once an industry moves beyond normalized levels of free cash flow, that stream of cash flows is by definition unsustainable, and no one should own a stream of anything that is unsustainable."

    He said current cash flows are unsustainable as a downturn is inevitable, and, thus, forward-looking investors are likely to cease driving industry stocks higher at a faster rate than the overall market.
    "We not only believe that the semiconductor-equipment industry is a pure cyclical, but we also believe that the stocks are trading as such as the market is beginning to acknowledge these long-term negative secular trends."

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    • This was one article on May 19, 2011.
      Why Goldman Sachs Just Dropped A Huge SELL Rating On Intel

      The most dramatic call you'll see today: A big fat SELL rating on Intel from Goldman Sachs.

      A blue chip firm putting such a negative rating on a blue chip stock that's been doing great always deserves some attention.

      Here are the key points behind the rating from Goldman's James Covello:
      The 22% M/M growth in the stock post-earnings is way out of line.
      Processor shipments are going to slow over the course of the year, in part because processors have been outselling PCS, and thus there's a catch-up effect.
      Due to average selling price declines and excess capacity, 2012 sales will be flat.
      Increased competition from ARM-based processors in tablets will also hit the company.

      In a related note, Goldman also has bearish commentary on the rest of the semiconductor industry:
      Inventory at all notebook makers are growing.
      2010-2012 period is seeing huge capacity increases for the whole industry that will lead to oversupply.
      During past cycles, equipment orders declined in each of the past two quarters following the cyclical peak.

      The firm also downgraded KLA to Sell and Applied Materials to Neutral.

      Intel stock on May 19, 2011 was $23
      KLA stock was about $41
      And AMAT was about $14.

      The only one he got it right on was AMAT as the stock went down in the next 12 months.
      But Intel went to $29 in 12 months which is a 25% rise
      While KLA went to $46 which is a 12% rise

      So only 33% correct.
      You could do better in Vegas going red or black on the roulette wheel.

      Now he expects Intel to drop to $16, after Intel makes some huge advancements in the cell phone market.
      What a joke of an ANALyst!

      Sentiment: Strong Buy

    • The problem with this type of analysis is that it assumes all players perform to the average but we know a small number of select companies, especially those that have built long term competitive advantage and control an ecosystem always manage to perform better than the rest. Cavello's logic fails to explain how Intel can still deliver gross margins of 60% or better.

      The problem is not the math, its poor judgement of the analyst.

    • Covello suggests KLA-Tencor and FormFactor Inc. (FORM), while Banc of America's FitzGerald likes Taiwan Semiconductor Manufacturing Co. (TSM) and NPTest Holding Corp. (NPTT).

      Covello, the Goldman analyst, said KLA-Tencor and FormFactor are defensive plays that "offer the highest-quality financials." Meanwhile, FitzGerald said NPTest hasn't participated in the run-up of chip equipment stocks and also has a new product coming out in the second half of the year that could boost its financials.

      Banc of America has an investment banking relationship with NPTest. FitzGerald does not own shares of the company. Goldman Sachs has an investment banking relationship with FormFactor.......
      FORM was $19 - now $5

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