S&P Cuts Semiconductor Equipment Industry Outlook

Plus: Analysts upgrade Martha Stewart Living and Office Depot, comment on Google and Microsoft's results, and downgrade Broadcom shares

From Standard & Poor's Equity Research

Semiconductor Equipment Sub-Industry (CYMI): Cuts outlook To negative from neutral

Analyst: David Kaplan

Based on recent results and comments from leading semiconductor equipment companies, we now see the start of a cyclical downturn in the semiconductor equipment market as likely in the second half of 2006. We had previously expected a later slowdown, beginning around the start of 2007. Of note, Teradyne (TER) recently stated it has seen slower demand since early June. We have a strong sell recommendation on Cymer (CYMI), and sell opinions on KLA-Tencor (KLAC), Amkor Technology (AMKR), FormFactor (FORM) and Lam Research (LRCX).

Martha Stewart Living (MSO) : Ups to 3 STARS (hold) from 2 STARS (sell)

Analyst: Loran Braverman, CFA

Ahead of the company's July 26 earnings release, we estimate a second quarter loss per share of 18 cents, vs. the year ago 65 cents. We believe the biggest drivers of results are the daily TV show, radio revenues, and DVD sales, which were start-ups in 2005, plus strong publishing revenues, and margin improvement in publishing and broadcasting. We continue to see a 12 cents loss for full 2006. Our 12-month target price is $16.

Office Depot (ODP) : Ups to 2 STARS (sell) from 1 STAR (strong sell)

Analyst: Michael Souers

Office Depot has fallen about 20% over the past three months. While we still view its shares as overvalued, trading at 17 times our 2007 earnings per share (EPS) estimate of $2.09, we think downside risk has lessened somewhat. We think pricing remains rational in the office supply retailing group, and that spending by corporate customers remains strong. However, we believe Office Depot's cost-cutting, which has produced sizable operating margin improvement, is ultimately limited by the absence of stronger same-store sales in its retail segment, which we do not see near-term. Our 12-month target price remains $32.

Google (GOOG): Reiterates 3 STARS (hold)

Analyst: Scott Kessler

The Internet search outfit posted second-quarter EPS of $1.97, including stock-based compensation charges, vs. $1.36 without such charges one year earlier, above our estimate of $1.81. Revenues of $2.456 billion were 3% above our forecast, reflecting search-market share gains at Google's websites. We are raising our EPS estimate for 2006 to $8.26 from $7.85, and for 2007 to $10.20 from $10.11. However, we are reducing our 12-month target price to $435 from $470, reflecting a compression in valuation measures for Google's peers, a lower discount rate in our discounted cash-flow model, and a trimmed 2006 free cash-flow estimate owing to notable capital spending in the first half.

Microsoft (MSFT): Reiterates 5 STARS (strong buy)

Analyst: Scott Kessler

Excluding certain items, Microsoft posted June-quarter EPS of 31 cents, vs. 34 cents one year earlier, below our forecast of 35 cents but above the Street consensus. Revenues rose 16%, with gains in the home and entertainment, and server and tools segments. The company also announced a $20 billion tender offer through which it will repurchase up to 8.1% of its outstanding shares for $22.50-$24.75 each. We expect bids to be fulfilled by late August. In addition, Microsoft announced a new $20 billion stock buyback. We view these actions favorably, as they should help actualize shareholder value. Our fiscal 2007 (June) EPS estimate rises to $1.46 from $1.39.

Broadcom (BRCM): Downgrades to 1 STARS (strong sell) from 3 STARS (hold)

Analyst: Thomas Smith, CFA

Broadcom announced preliminary second-quarter revenue of $941 million, below our estimate for $945 million. The company guides for third-quarter revenue near $900 million, as it sees a chip inventory build-up that may take until the fourth quarter to normalize. In addition, we believe the ongoing review of past stock option award practices will prompt restatements and prevent timely filing of the second quarter's Form 10-Q. We are reducing our EPS estimates to 80 cents from 90 cents for 2006 and to 95 cents from $1.10 for 2007. Our 12-month target price drops to $19 from $32, reflecting a target price-to-sales multiple at the low end of the historical range.

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