Chip manufacturing equipment sales slip - is it a bottom yet?

If you were thinking it might be time to bottom-fish among the semiconductor equipment stocks, you might want to restrain that impulse.

SEMI (Semiconductor Equipment and Materials International, a global industry association) reported yesterday that worldwide semiconductor manufacturing equipment billings were $7.83 billion in the second quarter of 2008. That is 26 percent less than the first quarter of 2008 and 29 percent less than the same quarter a year ago.

Surprisingly, China and Taiwan saw the largest drops in percentage terms. Given how much semiconductor manufacturing has moved offshore to these two countries, it is a clear indication that demand for semiconductors is lagging the capacity available to produce them. If there is excess capacity, it is a sure bet that the semiconductor manufacturing equipment sector will remain in the doldrums for the foreseeable future.

Fab build-outs grinding to a halt?

I have written previously (read it here) on the trend of chip makers "going fabless". In this scenario, chip companies do the design work and outsource the manufacturing to semiconductor foundries or "fabs". One would think that if the trend is continuing, there would be some strength in semiconductor manufacturing equipment orders from some of the big players in the contract fab sector. It appears that is not happening.

In a further sign of stress, it appears the biggest contract foundries are slowing their expansion of 12-inch fabs. Taiwan Semiconductor Manufacturing (TMSC), the largest company in the sector, has slowed 12-inch fab expansion and has signaled a conservative outlook. Major TMSC competitor United Microelectronics Corporation (UMC) has really put on the brakes on their expansion plans. They have completed construction of a building to house another 12-inch fab but the building remains essentially empty. These two companies are not alone. It is assumed the companies are waiting for demand to pick up before investing in manufacturing equipment.

Stocks hitting new lows --

Given the situation described above, it is no surprise that the big semiconductor equipment manufacturers are seeing their stocks hit new lows. It is pretty much across the board. Despite the business flowing in from solar manufacturers, Applied Materials (AMAT) is close to a 52-week low. Lam Research (LRCX) is also close to a 52-week low while KLA-Tencor (KLAC) has already hit that dubious milestone.

Optimists are predicting a big pickup in demand in 2009. If that comes to fruition, perhaps we really are seeing the bottom here. Still, the prudent course seems to be to wait to see some solid evidence of a recovery in demand for both chips and the equipment to make them. Patience will be rewarded.

Disclosure: none