It appears that the downturn in the semiconductor sector that began last year may be coming to an end, at least for some of the smaller equipment suppliers. Small-cap Ultratech (NASDAQ:UTEK) reported strong results last week along with an improving outlook. On the other hand, Novellus (NASDAQ:NVLS), which is a much bigger company, said revenues declined last quarter, compared with the previous quarter and year over year.

Last week, Cohu (NASDAQ:COHU) joined the reporting parade. Cohu makes testers for integrated circuits and counts Intel (NASDAQ:INTC) as one of its customers. As you know from your last experience buying a computer, you have to pay more money for a faster microprocessor. Intel determines the speed rating to put on a chip by testing it and rating it for the highest clock speed at which it performs properly. Cohu makes the equipment that performs these types of tests.

For the second quarter, Cohu reported revenue of $51.8 million versus $47.3 million a year ago. Despite the higher revenue, earnings actually dropped to $5.6 million from $6.9 million, partly because of lower gross margins and higher selling, general, and administrative expenses. So, then, why did the shares jump almost 14%?

The big leap was probably due to a strong outlook for the rest of the year. New orders during the second quarter tallied $71 million, which is a significant increase over the $44.4 million achieved during Q1. Furthermore, the backlog, which represents orders that have been received but not yet filled, increased 30% during the quarter.

Even though business is picking up, there are some factors that make me uncomfortable. One is that about half of the revenue comes from just two customers: Intel and Texas Instruments (NYSE:TXN). Obviously, if either takes some of its business elsewhere, Cohu is going to be hit hard.

Another factor is disclosed in this statement from Cohu's annual report filed with the Securities and Exchange Commission: "The semiconductor equipment industry in general and the test handler market in particular is highly competitive." It is true that the semiconductor market is extremely competitive, so saying that it's more competitive than most semiconductor segments is really saying something.

Lastly, the price ratios are a concern. The price-to-earnings ratio, which is 28, is definitely not in bargain territory. The price-to-sales ratio is around 3, which is a historically high level. Even if you think the current growth rate justifies these multiples, don't forget that the semiconductor industry is notoriously cyclical. While I have no doubt that this stock can push higher if business continues to hum along, I don't believe it offers a great risk/reward profile at the current price.

For more Foolish Takes on the industry, see:

And for more chatter on chips, circuits, and other things computer, check out these boards on Cohu , Novellus , Ultratech , and Intel .

Dan Bloom doesn't own shares of any company mentioned in this article. You can send him an emailif you would like to comment about this article.