Chip-Equipment Investors Won't Get It All Back in 2003

Hitting bottom may actually feel like a relief for the beleaguered chip-equipment industry, given its painful, slow-motion fall over the past six months or so. Some industry watchers have already predicted the group will hit a trough in the fourth quarter now under way, based on lousy order expectations.

But despite the drop, investors shouldn't expect a big snapback. With the exception of a few maverick optimists, most analysts say that after two thoroughly crummy years in a row, 2003 is still not likely to show an impressive turnaround.

"I don't think next year's going to be stellar year in terms of industry fundamentals," said Wells Fargo's Susan Crossley. The reason, she explains, is that despite expectations for anemic chip growth this year, the top 10 semiconductor outfits didn't pare back their spending at all. In fact, they spent about 22% of projected '02 revenues on equipment -- about on par with the historical average.

"That says to me that this year, as bad as it was for the equipment industry, didn't do much towards working off the [spending] hangover," says Crossley. "That tells me that next year is not going to be a barnburner in terms of industry growth."

The official voice of the chip-equipment industry, the trade group SEMI, predicted earlier this month that equipment sales will grow 15% in 2003, to $21.8 billion from this year's $18.9 billion. That outlook assumes that by the second half of next year, semiconductor inventories will be burned off and manufacturing capacity utilization will be on the upswing.

But take it with a grain of salt, because industry forecasts are notoriously prone to revisions. Last year at this time SEMI forecast that 2002 sales would be flat to slightly down. Yet in the past week, it said revenues are likely to end down 32% for the year, following an even worse 41% tanking in 2001.