For Chip Equipment Makers, a Little Bad News Has Big Impact on Shares

Makers of semiconductor manufacturing equipment saw only slightly fewer orders during April than in March, new data show. But in this dicey market for tech stocks, any kind of slowdown is bad news.

Major chip equipment companies saw their shares plunge Tuesday, leading a broad decline in the chip sector and helping to drag the Nasdaq composite index down 5.9% to its lowest level since November.

The Philadelphia semiconductor index, which tracks shares of 16 chip and chip equipment companies, tumbled 7.7%. It now has fallen 34.7% from its record high reached March 10.

Among chip equipment leaders, Applied Materials (ticker symbol: AMAT) sank $7.44, or 9.4%, to $71.88 on Tuesday, and KLA-Tencor (KLAC) dropped $5.56, or 10.7%, to $46.50.

North American semiconductor equipment makers in April posted $142 in orders for every $100 of products shipped, according to preliminary data reported late Monday by trade group Semiconductor Equipment and Materials International.

By contrast, an average of $145 in orders was received for every $100 in shipments during March, outstripping all previous records in the notoriously boom-to-bust-to-boom-again industry.

Investors use this “book-to-bill” data, which reflect a three-month moving average of the ratio of bookings to billings, to gauge the industry’s growth prospects.

Bookings rose to $2.7 billion in April, up 10% from March’s $2.45 billion, the trade group said.

The industry has been on a strong growth trend since late last year, reflecting a rebound from a slump that stretched back to November 1997, the previous industry high point before an equipment sales glut socked the industry.

Chip makers have been increasing capital budgets to buy, build and equip production facilities.

Several Wall Street analysts had said ahead of the release of Monday’s data that a slight letup in order growth was expected after five months of records.

But with demand for computer chips far outstripping production capacity, especially for circuitry used in products such as cell phones, analysts believe that any pause in growth for the underlying equipment used to produce electronics will prove temporary and regain momentum during the course of this year.

Still, investors in this increasingly distraught market can’t handle any disappointment, analysts noted. They also note that chip equipment companies’ shares remain at relatively high price-to-earnings multiples--even after their two-month slide.

Applied Materials now is priced at 32 times the $2.26 a share it’s expected to earn this year, even though the stock is down 37% from its peak. Next year, the company is expected to earn $3.26 a share, according to the consensus estimate from analysts tracked by Zacks Investment Research.

KLA-Tencor now is priced at 37 times expected earnings for its fiscal year ending June 30. Based on estimates for the next fiscal year, the stock’s price-to-earnings ratio is 23.

Other chip equipment firms include Novellus Systems (NVLS), down $5 to $40.06; Lam Research (LRCX), down $3 to $26.44; and Teradyne (TER), down $9.25 to $75.25.

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Not So Chipper

The Philadelphia semiconductor index, which tracks shares of 16 major chip makers and suppliers of chip-manufacturing equipment, plunged 7.7% on Tuesday to its lowest level since early February. Weekly closes and latest:

Tuesday: 869.74, down 72.92

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Source: Bloomberg News