All: BTB analysis:
Strong March Book-to-Bill Driven By Huge Bookings
Surprise
Salomon Smith Barney
Wednesday, April 21, 1999
--SUMMARY:--------------------------------------------------------------
Book-to-bill increases to 1.30 from 1.21. The large bookings increase was
unexpected and is a huge positive surprise.
Total bookings increased 14% to $1.151B, front-end up 12% to $833M, and
back-end up 18% to $319M.
Shipments increased 6% sequentially, front-end up 5% and back-end up 9%
We had expected shipments to increase at a faster pace given the declines
in Jan/Feb and this is difficult to explain.
We continue to believe that the steady recovery is on course and remain
with our stance to focus on select names (AMAT, ETEC, KLAC, and NVLS).
--OPINION:------------------------------------------------------------------
Total Bookings Increase Substantially, Shipments Rise Slower
Book-to-bill ratios increased for the sixth straight month in March to
1.30, which was a large positive surprise. The surprise was due to an
unexpectedly large increase in bookings and a smaller than expected rise
in shipments. We had expected a shipments to rise faster than bookings
and the resulting book-to-bill ratio to decline slightly. Total bookings
increased 14% to $1.151 billion while shipments only increased 6%,
resulting in a book-to-bill of 1.30 (versus 1.21 in February and 1.12 in
January). Front-end bookings increased 12% to $833 million from $743
million in February while shipments increased 5% to $638 million.
Book-to-bill of 1.31 in the front-end came in higher than expected due to
higher than expected bookings and lower than expected shipments.
Test/assembly bookings rose 18% to $319 million from $271 million while
shipments increased 9% to $249 million, resulting in a book-to-bill of
1.28 versus 1.19 in February. With Kulicke and Soffa on track to report a
better than expected bookings quarter, this was not totally unexpected
although the magnitude of the bookings rise was an upside surprise. As
with the front-end, test/assembly book-to-bill came in better than
expected due to better than expected bookings and lower than expected
shipments.
Unusually Strong Bookings
Looking back in time, we find that typically mid double digit sequential
bookings increases have only been achieved after a period of sequential
declines. With an artificially low bookings level, large sequential
increases then become easier to come by. This was the case back in the
October-December 1998 time frame when we witnessed bookings increases of
33% in October, 20% in November, and 15% in December. However, we have
already come up to a respectable bookings level of over $1 billion in
February and to have a 14% increase at this level is a huge surprise.
Throughout the 1997 upcycle, the largest sequential bookings increase was
8.0% in March and in the 1995 upcycle bookings increased by 12% in
February, 13% in March, and 16% in December. The point we want to convey
is that this is a rare feat to accomplish. We believe this may be
partially explained by the fact that Applied Materials is experiencing a
linear bookings quarter versus its typically back-end loaded quarter.
Shipment Data Difficult To Understand
With two consecutive months of shipment declines in January-February, we
had expected a large sequential rise in shipments - in the mid-double
digits. However, reported shipments increased a mere 6% to $887 million.
The back-end reported a sequential increase of 9% to $249 million while
the front-end rose 5% to $638 million. We realize that the reported data
is a rolling three month average but with virtually all companies on
track to report a sequential quarterly sales increase in the mid-single
digits, this would imply a larger pickup. Given that actual monthly
shipment most likely rose throughout the January - March time frame and
considering the data is a rolling three month average, this would result
in the stronger months of January and February being incorporated into
the March data. Accordingly, March should be a very strong month. The
preliminary data is prone to revisions and we believe this figure will
need to be revised upwards next month.
First Positive Year-Over-Year Bookings Comparison Since February 1998.
Over the last 6 months, we have seen significant improvement in
year-over-year bookings trends for both the front and back end sectors.
In fact, March marks the first month since February 1998 that
year-over-year bookings have compared favorably with the previous year's
month. Total bookings increased 3% year-over-year compared to a 18%
year-over-year decline in February, a 27% decline in January, and a 43%
decline in December. Year-over-year declines in the front end bookings
have steadily narrowed from 70% in September to a 4% increase in March.
Similarly, year-over-year back-end bookings declines have steadily
improved over the past 5 months, from a decline of 66% in November to a
decline of just 1% in March. Although shipment trends still have not
improved to the same degree, we believe it is just a matter of time
before the increased order rates translate into higher shipments.
February Bookings Revised Up Significantly
While revisions have been quite minor recently, February's bookings
revision of 5%, from $963 million to $1.014 billion is quite substantial.
Front-end bookings were revised up 5% to $743 million and test/assembly
bookings were revised up were revised up 8%. Without this revision
bookings would have increased even more than the reported 14%. Despite
the fact that we are now in March, January's shipments and bookings were
both revised upward by 3%. February's shipments were revised up by only
2% to $835 million. We still find it difficult to understand the shipment
data and given that the data is prone to significant revisions as
evidenced by February's bookings figure, we would not be surprised to see
a similar upward revision to shipments next month.
Focus On Select Stocks
As we stated earlier, the strong book-to-bill figures this month were a
pleasant surprise and better than our most optimistic estimate.
February's book-to-bill improvement from January was due to a larger than
expected shipment decline rather than a stellar bookings performance.
However, March's performance was driven primarily by a large positive
surprise in bookings and partially by lower than expected shipments.
Given that shipments have been depressed for the last two months, we had
expected shipments to pick up strongly this month. The main point to
gather from this report is that the equipment sector continues to be in a
steady recovery mode despite the perturbations in the PC market. We
continue to recommend focusing on select companies who have demonstrated
the ability to gain market share in this slower growth environment and
who have the best opportunity to beat consensus estimates. Our top picks
are Applied Materials ($56 3/4, 1H, price target-$76), KLA-Tencor ($50,
1H, price target-$60), Novellus Systems($47 7/8, 1H, price target-$80),
and Etec Systems ($24 1/2, 1H, price target-$62) |
