The Chip Rally: Will The Market Sell On The News?

With Intel (INTC) earnings looming this afternoon and a flood of other Q1 results looming in the days ahead, the Street has begun to ratchet up numbers - and to ponder whether the recent rally in the sector has already discounted a worst-than-feared earnings season. There is widespread expectations that Q1 results will be better than the Street had feared just a few months ago; estimates have been ratcheting up on a steady stream of reports suggesting manufacturers in some cases overshot in their zeal to cut inventory and have begun restocking. It’s certainly an encouraging sign that there have been very few earnings warnings heading into the quarter - quite a contrast with three months ago. But it’s also the case that this isn’t new news, and the semis have staged an impressive snap-back rally. The question, of course: What now?

Jefferies & Co. chip analyst Adam Benjamin asserted in a note this morning that it is possible the group could retrench 10%-15%, but he thinks investors will come back to the group in May and June, and could drive the stocks up another 20%-30% from current levels. Benjamin today ratcheted up his price targets on a number of stocks:

• Atheros (ATHR): To $17, from $12.


• Broadcom (BRCM): To $26, from $21.


• Micosemi (MSCC): To $14, from $13.


• Qualcomm (QCOM): To $47, from $39.


• Xilinx (XLNX): To $25, from $20.

Benjamin has a Hold rating on Atheros, and a Buy on the other stocks mentioned above.

Kaufman Bros. analyst Suji De Silva this morning said recent checks find order patterns have stabilized from late-2008 weakness and steady recovered through the first quarter of 2009, with March showing “a typical monthly increase post-Chinese New Year.” He points out that there has been a striking lack of negative earnings pre-announcements. He also contends that “momentum has continued into April, early optimism building aorund back-to-school orders.” But he cautions that with the stocks recent 27%-plus rally, stabilization of fundamentals and a second-half seasonal uptick are now largely priced into the stocks.  That said, De Silva also raised targets on a bunch of stocks today:

• NetLogic (NETL): Target to $33, from $30.


• Cypress (CY): Target to $8, from $6.50.


• MIPS Technologies (MIPS): Target to $4, from $3.


• Skyworks (SWKS): Target to $10, from $9.

Wedbush Morgan analyst Patrick Wang cautioned in a research note this morning that be thinks we’re in a W-shaped recovery, and that we are in for “a long and protracted return to normalized levels” which could take until the second half of next year. Wang writes that he is “increasingly cautions on semiconductor stocks” given the rally in the group, which he believes already reflects the supply-side correction. He expects Q2 guidance from the chip companies to be conservative - but ahead of current consensus estimates.

FTN Midwest analyst JoAnne Feeney today noted that conditions are improving for the communications semiconductor companies, although no end-market demand improvement has materialized so far. She says sharp production declines reduced component inventories for handsets to “healthy levels.” She says that orders strengthened in March, in particular for low-end handsets.

Canaccord Adams analyst Bobby Burleson this morning cut his rating on Linear Technology (LLTC) to Hold from Buy, asserting that industrial and communications chip demand is likely to remain weak through 2009. On the other hand, Burleson also upped his rating on Maxim Integrated Products (MXIM) to Buy from Hold, citing expectations for improving bookings, revenues and gross margins in the second half.