All right guys, here is a big post. The semi book to bill was worse than expected. (.64 rather than .67). Here I am posting an older article (2/21/2001) in which I have added this .64 to the previous numbers,
and it is ANOTHER 21% decline from last quarters! Is this the true trough I wonder?
NVLS tonight seems to guide OK I think, and it is true that 300mm equipment is needed
badly by the fabs to go with the new .13 chips.
Semi Equipment : Trade group SEMI reported that the North American semi equipment industry book-to-bill ratio was 0.64 in March, down from 0.73 in February. This is slightly below estimates from Salomon Smith Barney (0.65) and SG Cowen (0.70).
Archive Headline
21-Feb-01
Chip Equipment [BRIEFING.COM - Robert J. Reid] In the game of Battleship, the point is to bomb your opponent's ships before yours are bombed. While
you cannot see where your opponent's ships are, the more you bomb, the more you get the feeling that you're close. In the chip equipment industry, it's difficult to
predict a bottom but here you can also get a sense that you are close.
January Data Abysmal
SEMI, the chip equipment industry trade group, reported data for January after the close yesterday. It was much worse than expected. Book-to-bill came in at
0.81 meaning orders were 19% lower than shipments for the month -- a number less than one spells trouble. The consensus was in the 0.90-0.92 range. The
drop-off from 1.03 in December marked the largest sequential drop in ten years for January. Everyone knew it would be bad after recent reports from Applied
Materials (AMAT) and Credence (CMOS), but this was very bad. The more important number is that bookings were down 20% sequentially. It's bad out there
-- the key will be investor reaction. Orders are being slashed across the board especially recently as seen in the chart below:
Month
Book-to-Bill
Bookings
Sequential
Decline
Aug
1.23x
2,984.1
Sep
1.17x
2,887.6
-3.2%
Oct
1.16x
2,993.0
+3.7%
Nov
1.12x
2,707.3
-9.5%
Dec
0.99x
2382.3
-12.0%
Jan
0.81x
1890.5
-20.6%
APRIL 23RD .64x -21%
Our Take on It
The chip equipment makers trade in cycles. The stocks generally bottom 4-6 months ahead of the trough in orders. The risk is in predicting the bottom. For those
not in the chip equipment stocks, Applied Material's recent guidance of a 30% decline in sales and bookings for AprQ was a good sign that we are getting close
to a bottom. Historically, chip equipment stocks trade strongly from the trough sequential sales quarter to their peak sequential sales quarter. For example,
AMAT doubled from trough sequential sales in AprQ97 to AprQ98. From AprQ99 to JulQ00, the stock more than doubled from trough to peak sequential
sales quarters.
So why invest in an industry with declining fundamentals? At current prices, we believe investors have already factored in weak January bookings and are
expecting weak numbers for the rest of the first half of the year. As the year progresses, we believe investors are likely to look past the current downturn and
focus on the next upcycle. Accordingly, we expect that many of these stocks are at or near their troughs.
Historically, orders have declined 60% peak to trough on average in past cycles. To date, orders have declined 37% in 3 months making it likely that the
book-to-bill indicator is still on the decline. If history is any indication, orders should bottom in the September quarter. However, the decline in orders in this cycle
is much faster and steeper than previous cycles. As a result, there is no guarantee that history will be repeated. Since the market generally discounts 4-6 months
out, the sector should begin to perform well in the relatively near future.
Also, we expect end user demand to improve in the second half of the year and 2002. Don't read as much into the slowing pace of PC sales to the chip space.
While PCs make up a significant part of the market for chips, chip demand is becoming less PC-centric than in the past as more uses for chips materialize
including communications, appliances and automobiles etc.
Risks
First, January may not be the bottom of the book-to-bill chart. Q1 and Q2. Given consensus expectations of a 15%-20% decline in chip equipment spending in
2001 coupled with the 30%-35% decline in bookings for Q1 guided by front end equipment companies such as AMAT, NVLS, and LRCX, there will likely not
be a rebound in February and March as bookings are expected to decline further. Historically, the group has had false rallies at similar points on the book-to-bill
continuum.
Second, the valuations on the stocks are not exactly bargain basement relative to past cycles. The front end equipment companies are trading at forward p/e's
over 20x. While these are still lower than other tech bellwethers, they are still a bit high given the horrible industry conditions in the chip equipment space. With
investors suddenly concerned about high multiple tech stocks, that's a potential concern. Third, lowered spending forecasts by the chip companies going forward
could act as negative catalysts.
Conclusion
This is not a science. It's a bit of an art with some witchcraft thrown in. Our point is that it's tough to predict a bottom, but the data is getting pretty bad. If you're
not in the sector, the more bad news, the better. How the stocks react today to the January data will be a key to gauging investor sentiment on how willing they
are to overlook the expectation of continued bad news. Hopefully soon, investors will simply discount the bad news and not sell their holdings. When the group
begins to hold up even in the face of bad data, that's the time to pick up the shares.
Bottom line, the sector is a good place to be for 12-month and certainly 18-month price appreciation. Could the stocks decline another 25%? Sure. However,
it's a sector within the tech arena that will come back -- it's just a matter of time. People are beginning to realize that technology companies are cyclical. The
outlook is bleak for the sector, but these stocks are not going out of business. They will be around a decade from now. While our favorites include NVLS,
LRCX, KLAC, and KLIC, below are some additional chip equipment names to consider.
Chip Equipment Valuations Sorted By Forward P/E
Company
Ticker
Price
Fiscal Year
Ending
Market Cap
(mln)
First Call
EPS 2001
First Call
EPS 2002
Price/Earnings
2001
Price/Earnings
2002
LTX Corp.
(LTXX)
$13.75
July
$655.9
$1.32
$1.73
10.4x
7.9x
Cymer
(CYMI)
$23.69
Dec
$698.9
$2.08
$2.90
11.4x
8.2x
Asyst
(ASYT)
$14.62
Mar
$481.0
$1.86
$1.59
7.9x
9.2x
Varian
(VSEA)
$32.19
Sep
$1,033.3
$3.03
$3.10
10.6x
10.4x
Kulicke & Soffa
(KLIC)
$13.06
Sep
$637.3
$0.33
$1.13
39.6x
11.6x
Nova
(NVMI)
$8.75
Dec
$126.0
$0.39
$0.75
22.4x
11.7x
Teradyne
(TER)
$36.84
Dec
$6,428.6
$1.88
$2.93
19.6x
12.6x
Credence
(CMOS)
$22.80
Oct
$1,226.6
$0.88
$1.74
25.9x
13.1x
Veeco
(VECO)
$42.88
Dec
$1,050.6
$2.32
$3.24
18.5x
13.2x
PRI Automation
(PRIA)
$24.56
Sep
$616.5
$1.07
$1.80
23.0x
13.6x
ASM Lithography
(ASML)
$23.62
Dec
$9,795.2
$0.99
$1.42
23.9x
16.6x
Brooks Automation
(BRKS)
$36.75
Sep
$635.8
$1.76
$2.09
20.9x
17.6x
Novellus
(NVLS)
$40.63
Dec
$5,707.8
$2.08
$2.25
19.5x
18.1x
Rudolph Tech
(RTEC)
$44.75
Dec
$662.3
$1.62
$2.24
27.6x
20.0x
Applied Materials
(AMAT)
$45.94
Oct
$37,172.6
$1.93
$2.27
23.8x
20.2x
Lam Research
(LRCX)
$24.31
Jun
$2,980.4
$1.87
$1.20
13.0x
20.3x
KLA Tencor
(KLAC)
$40.31
Jun
$7,437.7
$2.11
$1.74
19.1x
23.2x
August Tech
(AUGT)
$12.88
Dec
$162.3
$0.17
$0.38
75.8x
33.9x
Avg (mkt Cap
Weighted)
22.0x
18.5x |
