Another Bad Month For Chips

On the surface, last night’s Semiconductor Equipment and Materials International Book-to-Bill ratio for May might appear as a positive, edging up slightly to 0.46 from April’s 0.42 reading.

That means that $46 in new orders were received for every $100 of product shipped last month. That appears to be good news – except that the improvement in the ratio was due to shipments falling faster than bookings. Bookings declined 2.6% to $704.4 million in May, down from $722.9 million in April. But shipments fell 8.6%, from $1.62 billion to $1.52 billion.

About the only good news is that the pace of the decline slowed for once, from April’s 40% plunge in bookings and 18% drop in shipments. Given that both were last even at about $2.38 billion in December, the route back to a 1.0 book-to-bill ratio could come more through falling shipments than through rising bookings. Not the kind of rebound investors are hoping for.

A quote from SEMI CEO Stanley Myers, who has been admirably candid about the chip equipment industry’s troubles: “It is likely that the prospects for sustained year-over-year improvements in monthly shipments are three to four quarters away.”

In other words, the industry likely won’t exceed current investment levels for another year. Investors looking at the carnage in the Nasdaq and thinking “October 1998” might want to think again – no 1999-style boom lies ahead, at least in the view of the chip equipment industry’s own trade association.

So what does SEMI expect? From the group’s projections issued last month: “SEMI also revised its 2001 worldwide projection for the semiconductor manufacturing equipment industry, estimating a 27 percent decline in worldwide equipment shipments from $47.7 billion in 2000 to $35 billion in 2001. Three percent growth is expected for the year 2002, followed by 22 percent growth in 2003.”

In other words, the industry doesn’t expect a strong rebound until 2003. What’s more, SEMI reduced its 2001 outlook just in the last month, from an estimate of a 27% decline this year to a 30%-32% decline projected yesterday.

An alternative theory to the efficient market theory has emerged in recent years, called the shifting sands theory. In essence, the theory states that markets shift only after enough evidence has accumulated to move the market in a new direction. At 40-50 times earnings estimates for leading chip companies like Applied Materials and Intel , investors appear to be pricing in a different future than the industry itself is projecting.

Given that the stock market tends to price in events 6-9 months ahead of time, and the chip equipment industry doesn’t expect year-over-year improvements for another 9-12 months, this one’s going to be close.