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Chip-Equipment Book-to-Bill Climbs Above Parity





March's rise in the chip-equipment book-to-bill ratio to above 1.0 -- the first month above parity in more than a year -- further confirmed that the industry is in the midst of a recovery. But stocks enjoyed no upside from Monday's report because it was largely expected by Wall Street.

"The news is good that certainly things are getting better in the industry," Edward White, an analyst at Lehman Brothers, said Tuesday. But "I don't think that came as a major surprise," White said.

The North American-based manufacturers of semiconductor equipment posted a book-to-bill ratio of 1.04, according to a preliminary report published Monday by Semiconductor Equipment and Materials International, or SEMI. That means $104 worth of orders were received for every $100 of product billed for the month. March was the first time in 16 months that the ratio of bookings to billings went over 1.0, SEMI said in a press release.

Overall orders totaled $839 million, up nearly 14% from last February, while billings totaled $808 million, down 1% from February.

The 1.04 ratio far exceeded Morgan Stanley analyst Steven Pelayo's forecast range of 0.90 to 0.95. "As demonstrated by the March semiconductor equipment book-to-bill ratio, we believe that semiconductor capital equipment is likely one of the few areas of technology that is seeing meaningful fundamental improvement in the near-term," he said in a note.

Sue Billat, an analyst at Robertson Stephens, pointed to increasing capital equipment budgets at companies such as Samsung as additional proof that semiconductor equipment business is strong. "The book-to-bill is really kind of late in the story relative to where we start to see things picking up," said Billat, who has been bullish on the semiconductor equipment group since January.

White said strong results reported last week by such companies as Novellus Systems (NVLS) and KLA-Tencor (KLAC) foreshadowed that the book-to-bill ratio would be up.

But he said he believes the group's valuations are a little high in the near term. He recommends that investors wait and see if the group experiences weakness in the seasonably slow summer and perhaps buy then.

Pelayo said the group is trading at roughly 37 times 2003 earnings and 24 times 2004 earnings, while historically the stocks have peaked anywhere from 30 to 40 times earnings. Although the stocks are at the high end of the range, Morgan Stanley rates the semiconductor equipment industry attractive given its improving fundamentals.

Among Pelayo's favorites: bellwhether Applied Materials, which is trading at 39 times 2003 earnings. He notes that the company's compounded growth rate in the last 20 years was 30% and its net margins in the last three cyclical peaks went from 8% to 16% to 23% in the last peak in 2000. Those numbers show the company is very efficient and seems to learn more every cycle, he said.

Shares of Novellus were down $1.29, or 2.6%, to $49.49 in recent trading. KLA-Tencor fell $1.41, or 2.2%, to $63, and Applied Materials (AMAT) rose 1 cent, or .04%, to $26.07.

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