Tech Investors Cheer $2 Billion Decline in Chip Equipment Orders

Chip investors, consummate suckers for the Sweet Spot, bid up tech stocks Wednesday on the strength of a report showing July semiconductor orders fell 74% from a year ago. While analysts were gingerly optimistic that the report might be more evidence of a chip-industry bottom, they said talk of a recovery remains premature.

July's comparison of new chip equipment orders to shipments - the so-called book-to-bill ratio -- rose to 0.67, meaning that for every $100 of equipment shipped, there were $67 worth of new orders received. The number topped expectations and marked its third straight monthly increase. Semiconductor Equipment and Materials International, which compiles the report, cited slightly higher sequential orders from chipmakers and a continued decline in equipment shipments.

But any pickup in activity comes off of "very suppressed demand levels" and represents companies restocking inventories, said Charles Boucher, analyst at Bear Stearns. A "full-blown cyclical recovery" would come when the economy bounces back and demand for end-products recovers, he added. "There really hasn't been strong economic recovery despite all the interest rate cuts, and that's a little bit of a worry."

Not There Yet

While better-than-expected equipment orders were a relief, analysts stopped short of announcing a recovery.

"What this is a sign of is that business has bottomed out - that's the only conclusion you can come to," said Shekhar Pramanick, analyst at Prudential Securities. "Now the wait for the recovery begins. [And] recovery will come after you see semiconductor revenues turn."

A recovery in the beleaguered chip sector is widely viewed as a harbinger of a broader tech turnaround. Analysts say they've seen higher orders for chips used in PCs and consumer devices, such as digital cameras and DVD players, and cell phones. Those are made by heavyweights like Intel (INTC), Micron (MU) and PMC-Sierra (PMCS).

After falling Tuesday on the Federal Reserve's dour economic outlook, chip and chip equipment stocks bounced back Wednesday on the strength of the report. Applied Materials (AMAT) closed up 4.5% at $43.90, while Teradyne (TER) ended up 7.3% at $31.49. Chip leaders Intel and Texas Instruments (TXN) also ended Wednesday higher. The Philadelphia Stock Exchange Semiconductor Index, which lost 4.3% Tuesday, gained 5.2% Wednesday. The SOX has gained 21.8% since April 4 as investors, convinced the sector will be the first to recover, rush for a deck chair on what they hope isn't the Titanic.

"Waiting until a sustainable order recovery could be too late," Pramanick said in a report Wednesday, reiterating his buy rating on Applied Materials, Teradyne, KLA-Tencor (KLAC), Novellus (NVLS), Lam Research (LRCX) Rudolph Technologies (RETC) and FEI (FEIC). Prudential has done underwriting for Rudolph and FEI.

Counting the Chips

July's ratio of 0.67 beat June's 0.56, as well as the ratios clocked in March, April and May. But it's still below February's 0.71, and sharply off levels last year. July's preliminary worldwide chip equipment orders of $764.2 million were 74% below the $2.9 billion in orders posted in July 2000, SEMI said.

Elizabeth Schumann, director of industry research and statistics at SEMI, said July's ratio was "definitely not an indication of a full recovery," and that people could be reading too much into the increase in bookings for the month. "It's a relatively low growth [of 5%] from a very low point."

Global economies are still weak and that could affect new demand for microelectronic-based products. Industry leader Applied Materials, which gleans 56% of its business from overseas, is a case in point. On Aug. 14, the company said it expected fourth-quarter sales to be about the same as the third quarter's, in which sales and earnings tumbled sharply from their year-ago levels. The company also said an "industry-wide decline in demand for most semiconductor chips continued to place downward pressure on new equipment orders" and that the chip industry "is experiencing near-historic lows in factory utilization, resulting in further cutbacks in capital spending."

In addition, Schumann cited a poll she took among SEMI members in June. While 32% said they see orders bottoming in the third quarter, about 39% expected the trough to occur in the fourth quarter of this year, meaning that levels could fall even more before the end of the year.

Peter Cardillo, chief strategist at Westphalia Investments, prefers skepticism until real evidence materializes. "We have to see capital spending pick up. [And] we have to get confidence by the CEOs," he said. "Once we start hearing from the CEOs that things are beginning to look better, then the market is going to do better. But until that happens, I think it's just a guessing game."

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