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.
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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.
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.)
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