Chip equipment makers see orders fall
SEARCHING FOR BOTTOM: With industry indicators at their lowest points in
years, many analysts are saying the chip equipment market `just can't get
worse than this'
BLOOMBERG
NEW YORK
Michael Murphy started buying Applied Materials Inc shares for his US$60
million Monterey Murphy New World Fund in March, figuring that
chip-equipment sales were poised to rebound from a seven-month slump.
The turnaround hasn't materialized. Applied, the No. 1 chip-equipment maker,
on May 15 said third-quarter profit will miss forecasts. Last week,
Semiconductor Equipment and Materials International said the industry
book-to-bill ratio, which measures demand, fell in April to a record low. The
group now estimates orders in the US$48 billion industry will drop 27 percent
this year.
Instead of running from the bad news,
investors like Murphy have kept buying the
shares on optimism that orders for
chip-building tools can't decline much
further. Investors say chipmakers such as
Intel Corp and Micron Technology Inc can't
afford to delay new purchases because
they need the latest tools to create faster,
more efficient chips to stimulate demand.
"People are saying that it just can't get
worse than this," said Murphy, whose fund
owns about 23,000 Applied Materials
shares. "Intel is refusing to cut its
capital-expenditure budget. People say `look, orders are going to pick up, and
you've got to be in the stocks before it happens.'"
As evidence, investors point to the past. In a 1998 slump, orders at Applied fell
56 percent, according to Lehman Brothers analyst Ed White. Last week, the
company said orders had fallen about 70 percent from their October peak of
US$3.6 billion.
Applied shares have risen 41 percent this year. KLA-Tencor Corp, the biggest
maker of semiconductor-inspection tools, has climbed 68 percent in 2001.
Novellus Systems Corp shares have risen 46 percent.
Teradyne Inc, the biggest maker of chip-testing equipment, has risen 19
percent this year. Lam Research Corp has more than doubled.
Advances in chip production make new tools necessary, investors say. Circuit
sizes are shrinking, chips are being created on larger silicon wafers and
semiconductor makers are beginning to use copper instead of aluminum for
circuits because it lets chips run faster and more efficiently.
That means Intel, Texas Instruments Inc, Advanced Micro Devices Inc and other
chipmakers will have to keep investing in equipment to compete in selling the
speediest and smallest chips possible.
Intel, for example, said it's sticking by its commitment to spend US$7.5 billion
this year on new equipment, even as first-quarter sales fell and second-quarter
sales are forecast to be unchanged to slightly down from the first.
"The last thing the chip industry can afford to do is cut production," said Brian
Eisenbarth, co-manager of the US$3 million Golden Gate Fund, which owns
shares of Applied Materials and KLA- Tencor. "It's already cutting prices. To
decrease prices and production -- that would be devastating."
Falling PC prices and the plan-ned Oct. 25 release of Microsoft Corp's
Windows XP operating system also will boost PC sales, investors say. New
electronic devices such as recordable digital-video disc players and
cellphones with palmtop-computer features should also help spur demand.
"There are a lot of nice products coming out right now," said Louis Kokernak, a
senior equity strategist at Martin Capital Advisors LLP, which owns about
33,000 Applied Materials shares. "I am hopeful that some of the technology
innovations" will help lift sales and profits, he said.
Analysts disagree about whether the April book-to-bill ratio is a sign that the
industry has reached bottom. SEMI, the industry trade group, reported an April
book-to-bill ratio of 0.42, meaning equipment companies booked US$42 in
orders for every US$100 in gear they shipped. In 1998, that number fell only as
low as 0.56, according to Thomas Weisel Partners analyst Eric Ross.
"We are very near to the fundamental equipment bottom," Ross wrote in a
report. "We expect an additional quarter of decelerating decline, possibly
leveling off into the second half of 2001 before orders again recover." Goldman,
Sachs & Co analyst Gunnar Miller and Bear, Stearns & Co analyst Robert Maire
aren't as positive.
"The market wants desperately to believe that orders are flattening, but that just
isn't the case," Miller wrote in a note last week. "Every channel-check and
leading indicator that we look to continues to deteriorate."
That may mean that Novellus, Applied Materials and Lam won't post a rise in
orders for the current quarter from the previous period, contrary to what
executives have said on recent conference calls, Miller and Maire said.
Novellus Chairman Rick Hill said on April 23 that orders would rise in the
current quarter to US$220 million from US$210 million in the first quarter.
Bookings will total US$1 billion for the fiscal year, he said, signaling a pickup in
the second half.
Applied Materials Chairman James Morgan last week said the order drop had
reached a bottom. Other executives have said the same.
"It's beyond my ability to fathom that the bottom is deeper than where we are
right now," Lam Chairman James Bagley said last month.
Novellus probably will reduce forecasts for orders in the current quarter when it
hosts a conference call with analysts and investors on Thursday, analysts
Miller and Maire said.
"Most of the industry is going to have to revise numbers downward," Maire said.
The May book-to-bill report, which is expected to be released June 21, may rise
slightly to 0.56, according to Goldman's Miller.
"The ratio has to begin improving as shipments decline, but anything below 1
is an industry contraction," Miller said.
Until that contraction ends, investors like Murphy may see stock prices fall in
coming months, delaying the rebound they have been counting on.
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