SAN FRANCISCO—Semiconductor stocks are showing surprising strength in spite of difficult global macroeconomic conditions, thanks to lower than expected estimate declines by chip firms and Wall Street, according to a JP Morgan analyst.
The Philadelphia Stock Exchange SOX index is now up 9 percent since bottoming out on July 17, compared with a 1 percent increase for the S&P500, said analyst Christopher Danely in a report circulated late Wednesday (Aug. 1). "We believe this has been caused by smaller than expected estimate reductions," Danely wrote.
Danely said JP Morgan was expecting consensus earnings estimates for large cap chip companies to decline by 5 to 10 percent during the recent period of earnings announcements. But consensus analysts' expectations have been reduced by an average of only 3 percent, according to Danely.
"We believe the reasons that earnings have held up better than expected are that margins and inventory are close to the trough," Danely wrote.
The Philadelphia Stock Exchange SOX index since July 1. Source: Google Finance
According to Danely, many chip companies stated during earnings announcements that inventory in the supply chain is nearly back to the trough levels of the 2008-2009 downturn. Most semiconductor companies' gross margins are closer to trough than peak, Danely said.
"We expect a strong increase in consensus estimates when semiconductor demand stabilizes, because inventory in the channel is lean and margins are near the trough," Danely said.
Danely said JP Morgan expects 2013 earnings per share estimates to increase 25 percent on average compared with 2012. He said he expects Fairchild Semiconductor International Inc., On Semiconductor Corp., Texas Instruments Inc. and Xilinx Inc. to show the most growth.
Danely said JP Morgan expects the macroeconomic environment to be the biggest driver of semiconductor stock performance during 2012, just as it was for the previous three years.