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THE CUTTING EDGE / MARKETPLACE

STOCK WATCH : Book-to-Bill Days May Be Numbered

July 01, 1996|From Bloomberg Business News

SAN JOSE — The computer chip industry's monthly book-to-bill ratio puts one number on the health of a $156-billion-a-year market.

The problem is that the number can be more confusing than enlightening, say analysts, investors and chip makers themselves.

"It's a worthless indicator," said Pat Weber, vice chairman of Texas Instruments Inc. and chairman of the Semiconductor Industry Assn., the trade group that reports the ratio. "I am trying to get that fixed."

Weber is pushing the association to look for a better measure--one that reflects the industry's global nature and isn't weighted by specific types of chips. These factors are among many that make the book-to-bill unreliable, he said.

"It isn't a good indicator of the health of the industry," agreed portfolio manager Graham Tanaka, who manages $200 million at Tanaka Capital and owns shares of Texas Instruments and Intel Corp. "We follow it because everybody else does."

Indeed, investors anxiously await the book-to-bill around the 10th day of each month. Often it is delayed for a day or more.

The number compares the value of chips that companies ship each month with the value of the new orders they receive. If the ratio is higher than 1.00, it indicates the industry is expanding, because new orders exceed past sales--a favorable condition for chip makers. If the number is lower than 1.00, it indicates orders are waning and that the industry's expansion is slowing.

That may not mirror what's going on in the market, however. For instance, chip stocks rose to highs in September, with the S&P semiconductor index climbing to 393.5. Shares have been declining since. The book-to-bill ratio, by comparison, rose for October and stayed above 1.00 until January, indicating that orders remained strong.

"Semiconductor stocks have been in a bear market since September," said Rick Berry, equity trading director at Murphey, Marseilles, Smith & Nammack. "The book-to-bill didn't reflect that."

An inherent problem is what the ratio measures: orders versus sales. While sales numbers are concrete--companies actually have sold the chips--orders are estimates. Companies aren't required to take possession of the goods they've ordered.

In times of short supply, such as 1995, customers often order more chips than they intend to buy. This artificially inflates the ratio.

What investors want, and what the SIA aims to create, is an indicator that reflects the worldwide market, and perhaps breaks it into segments such as memory chips, digital signal processors and microprocessors, which have different sales cycles.

Today, the ratio covers only the chips consumed in the North American market. While that market makes up the biggest slice of the worldwide pie--about 40%--it's not the fastest-growing segment, and Japan's share is almost identical.

The Asian-Pacific market, which makes up 12% of the total, is the fastest-growing.

The book-to-bill as a business tool was begun by Motorola Inc. in the 1960s, said Doug Andrey director of information systems at the SIA.

When Lester Hogan and other Motorola engineers, known as Hogan's Heroes, left Motorola and came to Silicon Valley to join Fairchild Semiconductor, they brought the convention of the book-to-bill with them.

For most of the 1960s and '70s, the ratio was used by companies to forecast their own demand. When a recession hammered the industry in 1974 and '75, the industry as a whole started looking for a way to measure the short-term trends.

Today, even the companies whose business the ratio is supposed to reflect don't see it as a helpful guide. Micron said it doesn't use the SIA figure because it reflects only part of the market.

For that reason, the SIA is considering making book-to-bill a global gauge. Its board hasn't yet voted on the proposal, Andrey said.

Another alternative is using unit volumes instead of revenue. That way, steep declines in prices wouldn't send the figure reeling. As prices decline, the value of new orders fall sharply, which sends the ratio down because shipments are being recorded at the higher prices.

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