Executive Summary
In May '24, the PCB book-to-bill ratio showed an unfavorable reading as demand and sales declined while the EMS ratio showed a favorable reading as sales increased. PCB demand fell below supply, leading to excess capacity; on the other hand, EMS demand remained above supply, leading to no excess capacity; EMS orders are higher than what the industry can fulfill, but the opposite is true for PCB orders. That indicates an economy that is currently cooling down. In conclusion, considering the slowdown might be seasonal, you should either hold or avoid semiconductors, tech stocks, or ETFs.
You Should Care About This Leading Indicator!
The book-to-bill ratio is a major leading economic indicator of the health of the semiconductor business. The US heavily relies on semiconductors for everyday functions, financial and technological success, and national security. This ratio can help you understand the economy’s overall health. Moreover, semiconductors are fundamental building blocks of modern electronics, and they are used across different industries ― consumer electronics, computers, telecommunications, the automotive industry, industrial automation, medical devices, and aerospace and defense.
This report analyzes the semiconductor business’s current condition for potential short- to mid-term equity positions ― stocks and ETFs. A few distinctions to remember when reading this report ― Printed Circuit Boards (PCB) are physical components. At the same time, Electronics Manufacturing Services (EMS) is a service that involves various electronic manufacturing processes. PCB production is just one step within the broader service offered by EMS companies, and PCBs can be designed and manufactured for multiple purposes. EMS services are customized based on a client's specific electronic device requirements.
PCB Book-to-Bill Ratio Drops Below 1!
Key Points
The North American Printed Circuit Board (PCB) book-to-bill ratio decreased from 1.06 to 0.95 in May, leading to a two-month downtrend. Looking at PCB, the book-to-bill ratio was down 10.4% and up 6.7% MoM and YoY, respectively. MoM and YoY, PCB bookings were down 2.7% and 6.4%, respectively, and its shipments were down 16.5% and 6.8%.
EMS Book-to-Bill Ratio Slows Down For The First Time In 2024!
Key Points
The North American Electronics Manufacturing Services (EMS) book-to-bill ratio decreased in May from 1.42 to 1.36, breaking the uptrend that began in Jan '24. MoM and YoY, the EMS book-to-bill ratio was down 4.2% and up 12.4%, respectively. Looking at EMS, bookings were down 16.2% and up 2.6%, MoM and YoY, respectively, and its shipments were up 3.7% and 5%.
A Healthy Cyclicality
Key Points
On a year-over-year basis, PCB bookings have been more volatile than billings/shipments, bringing a healthy cyclicality to both.
Investment Analysis → Hold (Neutral)
Looking at the North American PCB and EMS book-to-bill ratios trend, the chip manufacturing sector slowed down in May, reflecting some economic headwinds. The negative 2.7% MoM growth in PCB bookings drove down the PCB book-to-bill ratio from 1.06 to 0.95; MoM PCB billings/shipments declined even faster ― 16.5%.
On the other hand, the 16.2% MoM decrease in EMS bookings hindered the PCB book-to-bill ratio from 1.42 to 1.36; MoM EMS billings/shipments increased by 3.7%. YoY, the PCB and EMS book-to-bill ratios increased by 6.7% and 12.4%, respectively; the YoY increase in the EMS ratio shows that supply distribution efficiency has not improved compared to a year ago, leading to suppliers getting products to customers much slower ― order backlog. An order backlog is good because the demand exceeds the available supply.
However, despite the YoY increase in the PCB ratio, its current supply is ahead of demand. The current PCB book-to-bill ratio is below 1, representing an economy that is cooling down; on the other hand, the EMS one is above 1, representing an economy that is still expanding. Therefore, once again, we can conclude that the chip manufacturing sector has slowed down.
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