As of Dec. 19, the S&P Semiconductor Equipment index was up 65.5% for the year. Several issues in our coverage universe -- Lam Research (LRCX; ranked 5 STARS; $32), ASML (ASML; ranked 4 STARS; $19), Amkor Technology (AMKR; ranked 4 STARS; $17), Kulicke & Soffa (KLIC; ranked 4 STARS; $14), and LTX (LTXX; ranked 3 STARS; $15) -- have more than doubled. We believe it's unlikely that gains of such magnitude will recur in 2004. However, with global semiconductor capacity utilization nearing 90% and technology spending rising, we remain positive on industry fundamentals for 2004.
The North American book-to-bill ratio rose to 1.01, surpassing parity (1:1, or $1 in bookings for each $1 in sales) in October, for the first time in more than a year. In November, the preliminary book-to-bill ratio improved to 1.04. We expect the ratio to climb starting in February as semiconductor companies begin placing orders for capacity expansion. Foundry leader Taiwan Semiconductor (TSM ), for example, recently announced it would spend 25% to 30% of sales in 2004 on capital outlays, vs. an estimated 21% in 2003, with sales expected to grow significantly in 2004.
While we believe that an expected surge in March-quarter orders has already been reflected in the share prices, we also believe that sustained global economic strength through 2004 and an increase in corporate IT spending in the U.S. will likely mean a sustained rise in equipment orders through 2004 and into 2005. We don't think such a strong, sustained increase in orders has yet been discounted. Our favorite stocks in the group include Lam Research and Teradyne (TER; 5 STARS; $23.70), as well as chip-design software maker Cadence Design (CDN; 5 STARS; $17.75).
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