News & Analysis
Comment
docdivakar
There will always be some chip stocks to serve consumer & enterprise market but ...
goafrit
For me, there is no magic than looking at the health of the economy. If the ...
Chip stocks have room to grow, says analyst
Dylan McGrath
2/10/2012 2:09 PM EST
SAN FRANCISCO—Semiconductor stocks should continue to appreciate until at least early summer, now that business is picking up and the chip market upturn has entered a new phase, according to Christopher Danely, an analyst with JP Morgan.
In a report circulated Friday (Feb. 10), Danely wrote that many semiconductor companies and distributors, including Texas Instruments Inc., Microchip Technology Inc., Xilinx Inc. and Arrow Electronics Inc. have stated that their bookings have increased since mid-December. Data from the Semiconductor Industry Association also indicated that chip sales increased more than the seasonal average in December compared with November, Danely said.
Danely said the Philadelphia Stock Exchange's SOX semiconductor index has appreciated 27 percent since he called a bottom to the industry downturn in mid-September, well above the 16 percent gain posted by the S&P 500 in that timeframe. "Despite the move in the SOX, we believe the majority of upside to consensus estimates is in front of us as semiconductors are still under-shipping demand by at least 10 percent," Danely wrote.
Danley said the semiconductor market has now entered "phase III" of the industry upturn, with chip companies report improving order rates due to inventory replenishment. "We expect most companies to reiterate that order rates are improving throughout the quarter," Danely said.
In "phase IV" of the upturn, which Danely expects to begin in March or April, semiconductor companies will begin raising sales and earnings targets due to continued improvement in orders, Danely said.
While a number of investors have expressed concern that, based on the 27 percent improvement in the SOX since September, an upturn is already priced into current chip stock valuations. "We believe there is still plenty of upside remaining as semiconductors are under-shipping end demand by more than 10 percent,: Danely wrote. "As a result, we expect order rates to continue to improve in [the first half of 2012] due to inventory replenishment as demand now appears stable."
Danley said JP Morgan analysts expect at least two quarters of semiconductor inventory replenishment, even if end demand does not improve. He noted that in 2007 the chip inventory replenishment cycle last two quarters as the SOX improved 39 percent from a July 2006 bottom.
Danely said JP Morgan favors chip stocks with the most upside to margins, which should lead to the most upside to consensus analysts' estimates. JP Morgan recently downgraded Intel Corp. to "neutral" from "overweight" and Linear Technology Corp. to "underweight" from "neutral" due to a perceived lack of leverage. Danely said JP Morgan favors stocks including TI, Analog Devices Inc., Xilinx and ON Semiconductor Corp., all of which the firm rates as "overweight," believing that they offer margin and earnings-per-share upside above other chip stocks.
In a report circulated Friday (Feb. 10), Danely wrote that many semiconductor companies and distributors, including Texas Instruments Inc., Microchip Technology Inc., Xilinx Inc. and Arrow Electronics Inc. have stated that their bookings have increased since mid-December. Data from the Semiconductor Industry Association also indicated that chip sales increased more than the seasonal average in December compared with November, Danely said.
Danely said the Philadelphia Stock Exchange's SOX semiconductor index has appreciated 27 percent since he called a bottom to the industry downturn in mid-September, well above the 16 percent gain posted by the S&P 500 in that timeframe. "Despite the move in the SOX, we believe the majority of upside to consensus estimates is in front of us as semiconductors are still under-shipping demand by at least 10 percent," Danely wrote.
Danley said the semiconductor market has now entered "phase III" of the industry upturn, with chip companies report improving order rates due to inventory replenishment. "We expect most companies to reiterate that order rates are improving throughout the quarter," Danely said.
In "phase IV" of the upturn, which Danely expects to begin in March or April, semiconductor companies will begin raising sales and earnings targets due to continued improvement in orders, Danely said.
While a number of investors have expressed concern that, based on the 27 percent improvement in the SOX since September, an upturn is already priced into current chip stock valuations. "We believe there is still plenty of upside remaining as semiconductors are under-shipping end demand by more than 10 percent,: Danely wrote. "As a result, we expect order rates to continue to improve in [the first half of 2012] due to inventory replenishment as demand now appears stable."
Danley said JP Morgan analysts expect at least two quarters of semiconductor inventory replenishment, even if end demand does not improve. He noted that in 2007 the chip inventory replenishment cycle last two quarters as the SOX improved 39 percent from a July 2006 bottom.
Danely said JP Morgan favors chip stocks with the most upside to margins, which should lead to the most upside to consensus analysts' estimates. JP Morgan recently downgraded Intel Corp. to "neutral" from "overweight" and Linear Technology Corp. to "underweight" from "neutral" due to a perceived lack of leverage. Danely said JP Morgan favors stocks including TI, Analog Devices Inc., Xilinx and ON Semiconductor Corp., all of which the firm rates as "overweight," believing that they offer margin and earnings-per-share upside above other chip stocks.
|
|
|
|
|
Navigate to related information
yalanand
2/10/2012 10:53 PM EST
Not sure why Intel is downgraded to "neutral" from "overweight". Does it mean that Intel's recent release Medfield is not getting good response from the market ?
Sign in to Reply
daleste
2/11/2012 8:55 PM EST
I guess they worry that Intel will see lower demand since tablets are taking market away from personal computers.
Sign in to Reply
yalanand
2/12/2012 12:03 AM EST
@daleste, thanks for the reply. That precisely is my question. Medfield is meant for mobile/tablet platform so market expects medifield will not do well compared to ARM architecture ?
Sign in to Reply
daleste
2/12/2012 2:11 PM EST
@yalanand, I don't know much about the Medfield, but I did read that Motorola has planned to use it. I'm not sure how much of the market Motorola will have in the future. With the acquisition by Google, it could be anyone's guess. That could be why the analysts are shying away right now.
Sign in to Reply
elctrnx_lyf
2/12/2012 8:18 AM EST
The tablet processor play ground is really becoming hot and i feel this would be continue for few more years.
Sign in to Reply
goafrit
2/13/2012 7:51 PM EST
For me, there is no magic than looking at the health of the economy. If the economy does well, this will do well.
Sign in to Reply
docdivakar
2/24/2012 7:52 PM EST
There will always be some chip stocks to serve consumer & enterprise market but I wonder how many of the now top 10 will continue to 'grow' as the analysts expect. NEC used to be #1 in 1985 and today is not on the top 10 list!
Analysts on wall street serve one purpose very well -move money out of investors hands! Making these forecasts are obligatory!!
MP Divakar
Sign in to Reply