Falling Orders Raise Questions About Chip Equipment Stocks
thestreet.com
By Caroline Humer
Senior Writer
6/22/01 6:30 AM ET
Chip investors searching for signs of sector improvement in semiconductor
equipment monthly orders instead found more despair Thursday. And that could
hit the chip equipment stocks that have been rising on expectations of a rebound.
The three-month average of worldwide bookings
for May came in at $704 million, according to
Semiconductor Equipment and Materials
International, a trade group. The May figure is 3%
off the revised April figure of $723 million and 75%
below the year-earlier's $2.78 billion. The closely
watched book-to-bill ratio was 0.46, meaning that
$46 in new orders were received for every $100
worth of products shipped in the month.
With semiconductor companies still struggling
with weak demand, overcapacity, decreasing
prices and steep inventories, investing in new
technology and capacity has fallen to the wayside.
Microprocessor giant Intel (INTC:Nasdaq - news -
commentary), for instance, earlier this week
delayed deciding whether to build a $3.5 billion
plant in Israel, even as it maintained an overall
capital spending budget of $7.5 billion for 2001.
And until semiconductor revenues turn, Intel and
other chipmakers won't be sending chip
equipment manufacturers orders. So that means
chip equipment revenues will remain flat at best.
For investors, that makes putting money into
these volatile stocks trickier than usual. While
most agree that the cyclical semiconductor market
will recover at some point in the next 18 months,
investors who get in too early may have to wade
through some sharp declines before getting to a
payoff.
Valuations
Given current valuations, it's clear many investors are taking that risk. Prices on the
chip equipment sector have been on a steady upward climb since December, with
a few dips here and there. At these levels, the stocks are trading at fairly rich
price-to-earnings ratios for 2001 and 2002.
For instance, industry giant Applied Materials (AMAT:Nasdaq - news -
commentary) is expected to earn $1.06 in 2001 and $1.12 in 2002, meaning it's
trading at 46 times 2001 earnings and 43 times 2002 earnings. KLA-Tencor
(KLAC:Nasdaq - news - commentary) is expected to earn $1.85 in 2001 and $1.01
the year after, putting its 2001 P/E at 29 and 2002 P/E at 53. Novellus
(NVLS:Nasdaq - news - commentary) is expected to earn $1.47 this year and
$1.66 next, so it's trading at 34 times 2001 earnings and 30 times 2002 earnings.
But the earnings projections that back up these valuations are in danger. Earlier
this week, semiconductor testing company Teradyne (TER:NYSE - news -
commentary) said it would fall short of estimates this quarter and instead of
breaking even would lose 5 cents to 10 cents a share. Its stock has lost 10% since
then. Teradyne's loss may not have been a surprise, but it does signal exactly how
weak demand in the semiconductor sector has become.
Byron Walker, chip equipment analyst at UBS Warburg, believes more losses are
coming in either the second or third quarter, and for more than just Teradyne.
The Problem
"The problem is people have directly moved toward quality with the least amount of
fundamental technology risk, but the disconnect between that and earnings is
large, because earnings are going south," Walker says. "In fact, more than most
analysts believe, because if you look at First Call, there are very few analysts who
have dialed in losses. We will see losses."
The semiconductor industry hasn't finished bottoming, in part because it typically
includes large inventory write-offs industrywide, he says. And while the companies
are in the process of bottoming, Walker says, they aren't producing the cash that
leads to capital equipment expenditures. One of the problems ahead is that it'll be
tough for spending on chip equipment to match the record spending of 2000,
which means the year-over-year comparisons aren't going to look good.
The 87% increase in global semiconductor equipment revenue to $47.7 billion in
2000 -- the biggest ever -- won't repeat itself this year. SEMI on Thursday also
lowered its outlook for 2001 and now expects a 30% to 32% decline compared
with a 27% to 30% decline in revenue -- which will be the worst percentage decline
on record.
Fallen Down
Orders have fallen off in part because some of the markets that drove the growth in
2000 have disappeared. Telecom spending, for instance, has all but dried up at
the moment as large inventories and capital spending have decreased
dramatically.
Eric Ross, an analyst at Thomas Weisel Partners, says that in 2000,
telecommunications accounted for about 28% of total semiconductor revenues
and he expects it to make up 30% of 2001 revenues.
Ross sees semiconductor equipment orders picking up in the fourth quarter as
semiconductor companies start planning for equipment they'll need in 2002. Of
course, that depends on the personal computer market recovering in the year's
second half. Otherwise, the scenario gets pushed out further.
And so do the chip equipment earnings that investors are paying for now.
AdvocateDevil |
