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Chip-Equipment Book-to-Bill Rises Again

November orders for semiconductor plants rose 20%.

After flatlining for the past three years, the chip-equipment industry's vital signs are springing back to life. The release of a key monthly index after the bell Thursday showed accelerating demand for chip equipment.

In November, orders of new equipment for semiconductor plants jumped 20% from year-ago levels. That helped lift the semi-equipment book-to-bill ratio to 1.04, confirming the industry is back in growth mode. In other words, $104 worth of new orders were received for every $100 of product billed for the month.

October's book-to-bill ratio stood at 1.01, the first time orders outstripped billings since August 2002.

"The continued growth of bookings in November supports the optimism within the industry for a robust upturn in 2004," said Stanley Myers, head of the industry trade group Semiconductor Equipment and Materials International, or SEMI, which publishes the book-to-bill data. Earlier this month, SEMI forecast that equipment makers would see 39% growth in 2004, up from an estimated 8% growth in 2003.

Thursday's news marks the latest in a series of upbeat signals, as industry momentum has steadily accelerated this fall.

When it reported earnings last month,

Applied Materials

(AMAT) - Get Applied Materials, Inc. Report

, signaled the industry is at a "turning point," with upward momentum in sales and earnings. CEO Mike Splinter reported seeing "clear signs of an upturn" in equipment spending.

At the time, he estimated semiconductor companies were using about 90% of their factory capacity.

Chipmakers' steadily improving fortunes have prompted a number of investment banks to lift their outlooks for semiconductor capital spending next year. Earlier this week, Merrill Lynch hiked its 2004 spending growth estimate to 30%, up from 27%.

Chicago-based Berean Capital, an independent research firm, expects semiconductor capital spending to rise 25% to 30% in 2004, after increasing around 8% in 2003.

Investors will get a better read on spending trends in the earnings reports from

Intel

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and

Samsung

in mid-January. The top two spenders on semiconductor capital equipment typically estimate their equipment outlay for the year in those releases.

On Wednesday, J.P. Morgan speculated that Intel will lift its spending by at least 10% over 2003 levels, to around $3.85 billion. Earlier, the bank was expecting Intel to cut spending by 3%.

Intel's guidance "should be a positive catalyst for equipment stocks," predicted analyst Jay Deahna. "Intel's capex undulations are one of the most impactful fundamental variables for equipment stocks, and we believe consensus currently expects Intel's capital spending to be flat to

minus 5% next year."

Deahna believes a change in outlook for Intel's spending could help reverse the recent correction in chip-equipment stocks. Investors' ardor started to cool in early November, despite strong growth outlooks from

Novellus

(NVLS)

and Applied, as concerns crept in about

pricey share valuations.

Between Nov. 6 and Dec. 17, the S&P's semiconductor equipment index lost 16% of its value. It regained some lost ground on Thursday, however, rising 4.1% to 528.

Year to date, the index has soared 64%.