Chip sales dropped 2.5 percent in September

Duncan Martell

SAN FRANCISCO: The worst-ever slump in the semiconductor industry persisted

in September as sales dropped 2.5 per cent, to $10.2 billion, but the magnitude

of the month-to-month decline continued to moderate, suggesting the end of the

downturn is nearly at hand, an industry group said.

Japan and the Americas were most affected, with sales declining more than 6

per cent in both regions, the Semiconductor Industry Association (SIA) said in

its monthly report on chip sales. Sales in Europe fell less than 1 per cent,

however, while sales actually rose 2.6 per cent in the Asia-Pacific region.

Shipments of all types of products to the United States were temporarily

disrupted following the Sept. 11 air attacks, possibly contributing to the sharp

decline in US semiconductor sales, the group said. More striking than the

month-to-month drop is the comparison to Sept. 2000, when chips were pouring out

of factories, feeding enormous expectations for sales of computers, mobile

phones, and other electronics.

Sales tumbled more than 44 per cent since last September, when monthly global

semiconductor sales were $18.44 billion. Most semiconductor companies have

forecast sales in the calendar fourth quarter to be flat to slightly lower, with

a handful predicting sales rising sequentially about 5 per cent. Per-share

profit estimates for firms actually making money in the grim environment are

beginning to tick up.

"We believe that (year-over-year) comparisons should continue to improve

going forward with the first positive (year-over-year) comparisons beginning

around May to July of 2002, given those have very easy comparisons of down 33

per cent to 45 per cent in the current year," wrote Lehman Brothers analyst

Dan Niles.

Chip stocks aren’t cheap

But Niles cautioned against translating rebounding sales into rising stock

prices, noting that, on a historical basis, most chip companies remain

overvalued. Buying at a year-over-year bottom in semiconductor revenues has not

been a profitable venture in periods of slower economic growth such as in 1986

and 1991, Niles said.

In both years, chip stocks surged in anticipation of a bottoming of chip

sales but then hit lower lows during the upturn that had been reached during the

worst of the down cycle. Niles noted that, "valuations on a price-to-sales

basis are about (two to three times) the levels seen during the prior trough, on

average."

George Scalise, the president of the SIA, said he expects sales during the

final three months of 2001 to improve over the quarter ended in September.

"Information technology products such as personal computers and wireless

applications, combined with digital audio devices and other consumer products,

will be the demand drivers that lead the industry into recovery," he said

in a statement.

A sustained recovery may still be an open question, however. Consumer

confidence has dropped to seven-year lows, and consumer spending accounts for

about a third of US gross domestic product, which is the value of all goods and

services produced by the economy.

On Thursday, the National Association of Purchasing Management, or NAPM, said

its monthly gauge of factory activity plunged to 39.8 in October, its lowest

level since February, 1991 -- from 47.0 in September. A reading under 50 signals

that manufacturing activity is declining.