INDEX INTELLIGENCE: SOX—Any Signs of Recovery in the Chip Sector?, Frederic Ruffy, Optionetics.com
Tuesday June 5, 10:30 am Eastern Time
biz.yahoo.com
Semiconductor stocks are weighing on the technology sector on Wednesday after the release of the widely watched book-to-bill ratio. The PHLX Semiconductor Sector Index (^SOXX) is down more than 3% in early trading. Yet, although chipmakers are headed lower on Wednesday, for the year, the group is actually up 20.5%. Furthermore, since falling near two-year lows in early April, SOX has gained more than 50%. In other words, investors appear to be betting on a recovery in the semiconductor industry. However, given the recent book-to-bill ratio and other data, the signs of recovery have become more allusive.
In a press release late Thursday, Semiconductor Equipment and Materials International [SEMI] reported the latest book-to-bill ratio for the month of April. The book-to-bill ratio is the three-month average of new orders, or bookings, compared to the three-month average of orders shipped for the North American semiconductor capital equipment industry. In April, the total number of orders shipped equaled $1.68 billion compared to only $711.8 million booked. The book-to-bill ratio for the month of April was, therefore, .42.
In the press release Tuesday, SEMI also said, “the book-to-bill ratio is the lowest that the industry has posted in the past decade and reflects the sharp decline in April 2001.” Furthermore, in September 2000, the ratio hit a high of 1.17 and has been declining ever since. In March, the ratio stood at .59. April, then, represents a sharp drop from those levels. SEMI went as far as to say that the recent downturn in the semiconductor capital equipment industry was “unprecedented.”
Yet, no he recent book-to-bill ratio. ABN AMRO, for example, even reiterated its “Buy” ratings on shares of Applied Materials (AMAT), Lam Research (LRCX), and KLA Tencor (KLAC). The firm told clients that it remains upbeat because of “signs that the industry’s orders are likely hitting bottom in the second quarter of 2001.”
Still, investors sold shares of semiconductors on Wednesday and there are a number of reasons why talk of a recovery is perhaps premature. For one, the downward trend in semiconductor sales continues. According to the Semiconductor Industry Association [SIA], worldwide semiconductor sales for the latest month totaled $14.4 billion, or 4.5% below year ago levels. According to SIA,
"Since last November, we have witnessed worldwide semiconductor sales continually decline due to an inventory overhang and macroeconomic factors. We continue to believe that the industry will complete the inventory correction in the third quarter and the recovery will commence in the fourth quarter."
In addition, pricing within the chip sector remains weak. As evidence, prices of Dynamic Random Access Memory [DRAM], one of the best proxies for chip prices, continue to slide. For example, prices for 128 MB DRAM (Synch PC-100) have fallen to $4.00, compared to $12.50 a year ago and $7.00 at the start of the year. One month ago, the same chips sold for $4.75. Therefore, the ongoing decline in DRAM prices is at odds with th otion of an imminent recovery in the chip sector.
At the same time, the valuations afforded to semiconductor stocks have grown since our last report. On April 13, the average price-to-earnings ratio [P/E] of the sixteen components of the semiconductor index stood at 16.5. Owing to a sharp increase in the P and significant declines in E, the P/E is now in excess of 38. The average ten-year earnings growth rate is less than half of that. Therefore, without more evidence of a recovery in the chip and chip equipment sector, there is a sizeable risk that prices come down to better reflect actual earnings and growth trends within the sector.
In conclusion, the weakness in the semiconductor index on Wednesday may be nothing more than profit taking after a six-week 38% surge, but it may also reflect fundamental trends within the sector. For one, the weakness appears to be related to the book-to-bill ratio that showed the worst industry conditions in over a decade. Recent worldwide semiconductor sales number, DRAM prices, and seemingly high valuations are also at odds with the notion of a recovery in the chip-making sector and, consequently, semiconductor stock prices. |
