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The fragile recovery in the semiconductor industry is looking increasingly wobbly. More proof of that: The

book-to-bill ratio for equipment used to make chips, a key measure of order growth, just dropped for the third month in a row.

The book-to-bill ratio edged down to 1.14, from 1.22 last month. A book-to-bill of 1.14 means that $114 in new orders were received for every $100 of product billed for the month.

Equipment bookings in the month of August slid 5% from revised July levels, according to Semiconductor Equipment and Materials International, a trade group. The organization's director of research, Dan Tracy, said the order trend doesn't offer "any signal of substantial further improvement this year."

Because the news reflects August results, it isn't likely to move stocks much. But the continued slide underscores the bleak near-term outlook for the equipment industry. Just as important, the fact that semiconductor companies aren't ordering more equipment shows they don't expect to see demand for chips pick up any time soon.

A Slow-Motion Train Wreck?

Banc of America recently speculated that the leading semiconductor index could collapse to its 1998 trough of 198, based on the stream of earnings disappointments and negative earnings revisions from chipmakers. The SOX has lately flirted with new four-year lows, dipping to as low as 257 in intraday trading Wednesday afternoon before closing at 262.79.

The index has skidded downhill since peaking this year in March at 638.

But the worst part is that business expectations are still too high, warned Banc of America's John Skeen in a research note. "We can easily envision further cuts of 15% to 25% for 2003 consensus estimates soon," he said.

Reflecting the bum outlook for chips through the first quarter of next year, Bear Stearns said Wednesday that it now expects semiconductor revenues for the year to stay flat with 2001 levels. Analyst Charles Boucher said 2003 should see growth on the order of 17%, rather than the previously expected 25%.

The bank also chopped revenue and profit estimates for nearly a dozen companies under coverage, including analog names such as

Analog Devices

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Texas Instruments

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, which had until recently ducked the worst of the bearish sentiment.

Other companies to suffer downward revisions were


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LSI Logic

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"The month of September, normally a very strong month, is shaping up as a tepid one, capping a lackluster third quarter with a fizzle rather than a bang," Boucher wrote. September revenues usually rise between 15% and 35% from August, but this year they're on pace to grow 18% or less, reflecting growth at the low end of the historical range, he wrote.

"This is likely to cause backlogs to remain flat or even shrink, making it unlikely that companies will provide positive guidance for Q4," concluded Boucher.

In another potentially worrisome trend, the bank said anecdotal evidence suggests inventory levels of analog chips, particularly in Asia, could be on the rise.

The uninspiring outlook for chips will no doubt weigh on equipment suppliers. Fourth-quarter bookings for chip equipment are likely to drop 10% to 20%, predicted Banc of America analyst Mark FitzGerald in a note, junking his earlier forecast for a slide of 4%.

FitzGerald is especially worried that Taiwanese foundries will invest less than expected on new equipment, even after they reduced capex budgets earlier this summer. The foundries accounted for over a third of equipment sales in the first half of 2002, but are expected to scale back spending, given slower-than-expected sales among customers such as

Philips Electronics

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