Morgan Stanley Shuffles Chip Ratings

Morgan Stanley semiconductor analyst Mark Lipacis this morning pounded the table on the chip sector, while shuffling some ratings on stocks in the group.

“Solid Q2 results, upward revisions and the group’s out-performance appear to have left investors thinking that semis have already benefited from a re-stock and [that] the group has topped out,” he writes. “Our work shows that inventory restocking hasn’t even started. We believe the combination of lean inventories, improving utilization and improving demand will lead to an inventory restock, further upward revisions and continued [year-over-year] unit growth acceleration through December 2009.” Consequently, he says “we expect continued out-performance from semis” in the second half.

That said, Lipacis also advises shifting from “pure leverage plays” to “companies with product cycles.” Here’s a rundown on his chip rating changes made by Lipacis and his colleague Atif Malik:

• Altera (ALTR): To Overweight from Underweight. Lipacis notes that the previous bearish stance reflected concerned about orders from China, and a belief that the company would underperform stocks with higher costs and more operating leverage. But he says those factors are now baked in - and he sees a pick-up ahead from China-based OEMs, with upside from demand in India. His target on the stock is $23.


• Xilinx (XLNX): To Overweight from Underweight. Lipacis writes that concerns on a shipment pause into the China communications infrastructure market appear baked into the stock. He says China 3G build should resume in Q4, with new orders from India coming as soon as the first half of 2010.


• PMC-Sierra (PMCS): To Overweight from Equal Weight. Another call on a rebound in demand from China and India.


• Lam Research (LRCX): To Overweight from Underweight. Malik’s upgrade is a bet on a resumption in spending on NAND memory, where the company gets about 30% of its revenue.


• Texas Instruments (TXN): Downgraded to Equal Weight from Overweight. Lipacis says that recent earnings upside is already baked into the stock.


• Novellus (NVLS): Downgraded To Equal Weight from Overweight: “Our thesis on better-than-expected operating expense control” and top-line growth from the DRAM sector “has largely been played out.”


• STMicroelectronics (STM): To Underweight from Equal Weight. “While we expect STM to appreciate over the next 6-to-12 months, we think it will do so at a slower pace than our coverage universe,” Lipacis writes.

In today’s trading:

• Altera is up 55 cents, or 2.8%, to $20.15.


• Xilinx is up 79 cents, or 3.6%,. to $23.


• PMC Sierra is up 41 cents, or 4.5%, to $9.44.


• Lam Research is up 62 cents, or 2%, to $32.16.


• Texas Instruments is up 5 cents, or 0.2%, to $24.91.


• Novellus is off 14 cents, or 0.7%, to $19.49.


• STMicro is up 56 cents, or 6.3%, to $9.46.