Novellus — How to Play Monday’s Earnings Report

Semiconductor equipment maker Novellus (NASDAQ: NVLS ) reports earnings for the
quarter ending Sept. 30 on Monday. With the semiconductor industry on the
downside of a cycle, investors should not expect much from the report. The
allure of technology stocks is simple greed. When times are good and markets are
rising, technology shares generally outperform the rest of the market. The flip
side is that when times are tough and markets are falling, technology shares
fall harder. For Novellus, the turn began in March of this year. Since that
time, shares steadily have drifted lower as business prospects deteriorate. With
the company warning of a reduction in sales in early September, Novellus all but
confirmed a down cycle. The only question now: When do we hit bottom? During the
past four quarters, Novellus has slightly beat average Wall Street estimates:
Since the June 30 report, analysts have been slashing estimates for the quarter
ending Sept. 30 and the full year. Ninety days ago, the expectation was for
Novellus to make 87 per share. Today, the estimate is for the company to make 68
cents per share. For the full year, the company is expected to make $3.05 per
share. Ninety days ago, the estimate for the year was at $3.58 per share. In
2012, earnings are expected to drop to $2.67 per share, versus ninety days ago,
when the 2012 estimate was for $3.72. At current prices, shares of Novellus
trade for 10 times 2011 estimated earnings. Click to Enlarge The drastic changes
in outlook have pushed shares of Novellus another leg lower. The stock is down
18% since the beginning of July. During the past year, the stock is slightly
higher. Novellus faces great risks heading into Monday's report. The
volatility of earnings estimates during the past three months has only increased
uncertainty, and the company now is on record for noting a slowdown in customer
spending. Not that any of this is surprising given the circumstances, but it
should be troubling for anyone looking to own or trade NVLS. Has the stock
fallen enough? Shares of memory chip maker Micron Technology (NASDAQ: MU ) fell
15% after the company announced earnings for the quarter ending Aug. 31. That
came on the heels of a stock that already was down significantly. And there is
no guarantee that Novellus will meet even the reduced estimates. As a guide for
how bad things can get for tech stocks like Novellus, I would suggest looking at
where the stock traded when things bottomed in late 2008. The stock came very
close to hitting $10 per share at that time. With Novellus trading for 10 times
current-year estimated earnings and those earnings are in decline the price is
too high. The odds suggest Novellus has further to fall in the cycle. The
company should offer more clarity Monday, but that dose of reality is likely to
be negative. As such, the way to play this one is on the short side, as the
stock is likely to lose more value after the report. As of this writing, Jamie
Dlugosch did not own a position in any of the aforementioned stocks.