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After yesterday’s Agere (AGR) preannouncement, we decided to update our research on semiconductor industry fundamentals. This has been made easier since we received a complimentary trial of Zacks Research Wizard.

We first note that days inventory on hand at 39 semiconductor companies listed on public markets in the U.S. improved slightly in the December quarter. This improvement is in line with normal seasonality, as the holiday season is typically marked by strong sales of consumer electronics and the inventory moves away from the manufacturer toward the end user. On a year/year basis to more accurately reflect the seasonality, the days inventory on hand rose.

semi inventory

What the chart doesn’t show is what happened to inventory in the channel. For the uninitiated, the “channel” is everything between manufacturer and end user. For semiconductors, the channel includes distributors, the manufacturers that put the chips into end products such as cell phones or computers, and distributors, wholesalers and retailers of the end products. Given the increasing evidence of slowing consumer demand, the channel inventory could be particularly significant right now (remember Agere’s warning was due to channel inventory corrections).

Next we turn to capacity utilization, which has clearly started to fall. Excess capacity means the potential for even more inventory to be produced, which tends to put downward pressure on prices. Since the majority of semiconductor manufacturing costs are fixed, low utilization means lower profits - either because prices have to be reduced or because the per-unit costs are higher when production is cut.

semi cap utilization

Next we turn to orders for new semiconductor equipment, which when installed will increase capacity still further (thus lowering utilization still further). The new equipment orders continue to rise at a much faster rate than the end demand for semiconductors.

semi equipment orders

So there you have it - on an industry-wide basis things are bad and appear likely to get worse. We’ll finish things off with a list of the companies whose days inventory grew year/year:

semi change in days inventory

Author's note: Zacks Investment Research has provided Stock Market Beat with a complimentary trial subscription to Research Wizard.