Semiconductor-equipment orders held steady for the third straight month in July, while a key industry ratio showed slight improvement for the fifth straight month.
The data reinforce corporate reports of past weeks that indicated moderately better conditions for the industry. Stocks have increased during the past few months on the hope that improvements would come, but the degree and sustainability of such a turn remains unclear.
The book-to-bill ratio, which measures orders received against product shipped, for July was 0.93-to-1, based on preliminary data compiled by industry trade group Semiconductor Equipment and Materials International (SEMI). For June, the final ratio was 0.90-to-1; for July of last year the ratio was 1.04-to-1.
A ratio below 1.0 implies fewer orders than shipments, generally a bearish indicator for future sales. The ratio has been below 1.0 since September, and February's ratio of 0.77 marked the lowest reading since late 2003. From that month, however, the ratio has increased, mainly thanks to declining shipments.
Equipment makers in North America shipped product valued at $1.10 billion in July, down from $1.15 billion in June and $1.53 billion in July 2004. The data are based on a three-month average.
Orders held flat at $1.07 billion in July from $1.02 billion in June and down from $1.59 billion in July 2004.
The equipment industry has cooled in 2005 after global revenue growth of 67% last year. Chip manufacturers have slowed their purchases after last year's heavy spending and an inventory build that stretched into the early months of 2005.
Signs show coming improvement, though. A wide range of chipmakers reported increased factory usage in the second quarter headed into the seasonally strong back half of the year.
, the world's largest chipmaker, raised its capital expenditure budget in July for the second time this year as its factories are almost maxed out.
A week ago,
, the world's largest equipment maker, told investors it expects order growth of 5% to 10% for the current quarter as foundries and memory manufacturers ramp their spending. The outlook provided a boost to peer stocks during the past week.
The key regarding Applied Material's outlook is that it indicates that business conditions are already improving. Its report was issued a month after most of its peers, so Applied had an extra month of data to draw from to issue its projections.
issued its results at the end of July. Its order target had a midpoint of flat growth, better than most of its earlier-reporting peers that projected order declines generally on the magnitude of 5% to 10%.
These stocks trade ahead of changes in fundamentals, so they've rallied since May partly because of expectations that orders would rebound later this year.
Most in the sector are up between 15% and 30% since early May, but during the course of this year, results have been more mixed: Applied Materials is currently up 6%, KLA-Tencor is up 5%,
is up 1.6%,
is down nominally and
is off 10%.
In order for these stocks to log sustained gains, future results would have to outpace current financial estimates.
Industrywide growth expectations from SEMI for 2006 foresee an 8.1% rise in global sales, a relatively tame performance over the course of a year. Such muted growth is also on deck for 2007 and 2008, as sales are expected to increase 10% in 2007 and 14% in 2008.
The current industry downturn has also been
relatively tame, with global sales expected to drop 12% this year. That's been relatively good news for investors in 2005 who haven't had to endure decreases in their holdings to multiyear lows.
The flip side of this trend is that shares fail to reach multiyear highs if companies log only moderate improvements to future financial results. The present rally in this sector has already lifted many stocks to one-year highs, increasing hopes once again for a significant rally.
Such a sustained run remains far from certain.