Recent commentary from management at Applied Materials (Nasdaq:AMAT), Intel (Nasdaq:INTC) and Advanced Micro Devices (NYSE:AMD) seems to indicate the current semiconductor cycle is in a bottoming process, providing an opportunity for investors willing to make that bet.

IN PICTURES: 8 Ways To Survive A Market Downturn

Applied Materials Reports Messy Quarter
Applied Materials, which manufactures capital equipment for sale to Intel and others, recently reported on its fiscal second quarter ended April 26. The company had a GAAP loss of $255 million, or 19 cents per share. The quarter was a messy one, as usual for technology companies. But excluding one-time items and stock option expenses, the loss comes in at $136 million, or 10 cents per share.

New orders in the quarter totaled only $649 million, leading to a $3.16 billion decline in backlog - a drop of nearly $1 billion sequentially.

Management Optimistic Despite Recent Earnings
Despite the weak earnings report, management at Applied Materials gave optimistic comments about current conditions in the industry during the conference call.

CEO Michael R. Splinter said, "The U.S. economy is showing signs that its rate of decline may be slowing. The market in China is responding to stimulus, driving demand... As a result, factory utilization is rising in semiconductor and display."

Applied has a strong balance sheet and will ride out the balance of the recession. It had $2.06 billion at the end of the first quarter with total liabilities totaling $2.65 billion.

Intel Suggests Industry Has Stabilized
Intel also came out with positive comments on the cycle at its analyst meeting, with its CEO saying that the second quarter looked good so far to date, with full results dependent on June sales. He also said that the analyst expectation of a 10% drop in personal computer sales for 2009 might be too aggressive given what he has seen in Intel's business.

Advanced Micro Devices CEO Dirk Meyer made similar comments during the company's first quarter earnings conference call in late April. He said, "IT demand continued to be sluggish [but] it appears that the severe inventory corrections of the prior quarter have stabilized and should play out completely in the coming quarter."

Although Intel and the rest of the semiconductor industry is sometimes glamorized by investors due to its inclusion in the technology sector, it is one of the more intensely cyclical businesses, no different than steel, energy or any other basic material business. (Read Cyclical Versus Non-Cyclical Stocks to learn more about cyclical securities)

Book-To-Bill Ratio Up In March
SEMI, a capital equipment industry trade group, released the book-to-bill ratio for the industry for April 2009, and the results provide a slight confirmation of what executives are saying about the cycle. The group said that the preliminary book-to-bill ratio for March came to 0.61, higher than the 0.49 seen in February. The ratio is a three-month moving average of billings and bookings for the industry.

Reports from the Semiconductor Industry Association showed that sales of semiconductors in March 2009 totaled $14.7 billion, a 3.3% increase over February.

Investors who don't want security specific risk can look at the Semiconductor HOLDRs (NYSE:SMH) or the PowerShares Dynamic Semiconductors (NYSE:PSI) - two ETFs that hold shares of semiconductor and capital equipment stocks.

Bottom Line

Managements of some large semiconductor and semiconductor capital equipment companies have given investors hope that the cycle maybe troughing. Investors, therefore, should look for opportunities to get in if they agree with those hopes. (Read Buy When There's Blood In The Streets to learn how contrarian investors find value in the worst market conditions.)

Related Articles
  1. Investing

    What’s Holding Back the U.S. Consumer

    Even as job growth has surged and gasoline prices have plunged, U.S. consumers are proving slow to respond and repair their overextended balance sheets.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Nasdaq Biotech

    Obtain information about an ETF offerings that provides leveraged exposure to the biotechnology industry, the ProShares UltraPro Nasdaq Biotech Fund.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Europe Financials

    Learn about the iShares MSCI Europe Financials fund, which invests in numerous European financial industries, such as banks, insurance and real estate.
  5. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Insurance

    Learn about the SPDR S&P Insurance exchange-traded fund, which follows the S&P Insurance Select Industry Index by investing in equities of U.S. insurers.
  6. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Small Cap

    Learn about the SPDR S&P Emerging Markets Small Cap exchange-traded fund, which invests in small-cap firms traded at the emerging equity markets.
  7. Mutual Funds & ETFs

    ETF Analysis: ETFS Physical Platinum

    Learn about the physical platinum ETF. Platinum embarked on a bull market from 2001 to 2011, climbing to record prices along with other precious metals.
  8. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Turkey

    Learn about the iShares MSCI Turkey exchange-traded fund, which invests in a wide variety of companies' equities traded on Turkish exchanges.
  9. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  10. Mutual Funds & ETFs

    ETF Analysis: Guggenheim Enhanced Short Dur

    Find out about the Guggenheim Enhanced Short Duration ETF, and learn detailed information about this fund that focuses on fixed-income securities.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. The New Deal

    A series of domestic programs designed to help the United States ...
  4. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  5. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  6. Sucker Yield

    When an investor has essentially risked all of his capital for ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!