Analyst calls ‘bottom’ of IC downturn
Christopher Danely, an analyst with JP Morgan, said in a report circulated Thursday (November 3) that the nearly over semiconductor industry earnings season has provided more evidence of a bottom in semiconductor fundamentals and stocks, with several chip companies and distributors indicating that orders are bottoming out.
"We now believe we are in Phase I of the semiconductor upturn—orders stabilizing," Danely wrote.
Danely reiterated JP Morgan’s positive stance on the semiconductor sector and advised continued buying of chip stocks. He cited increased signs of a fundamental bottom and increasing likelihood of revisions to Wall Street estimates for chip firms during the first half of 2012.
Danely said that over the past few weeks, several chip companies and distributors, including Fairchild Semiconductor International Inc., Texas Instruments Inc., and Arrow Electronics Inc., have stated that they are experiencing a bottom in order rates. Arrow expects semiconductor manufacturers should see orders improve in the first quarter of 2012 and could strengthen further in the second quarter of 2012, Danely said.
Chip sales data from the Semiconductor Industry Association combined with fourth quarter guidance from chip firms indicates that semiconductor units should be flat to down during the second half of 2011, far below the expected 15 percent unit growth for PCs and 8 percent unit growth for handsets, according to Danely. He said JP Morgan analysts believe this is "hard evidence" that semiconductors are under-shipping end demand. This should lead to increased order rates in the first quarter of 2012, after end demand stabilizes due to inventory replenishment, Danely said.
Danely projected that "phase two" of the upturn—when semiconductor companies stop lowering estimates—would commence late in the fourth quarter of this year. "We expect this to occur between now and the end of the year as orders remain stable and inventory reductions run their course," Danely said. "We would expect the catalyst to be updates during early December."
"Phase three" of the upturn, defined as when several chip companies report improving order rates as demand stabilizes and inventory needs to be replenished, is expected to occur in the first quarter of 2012, according to Danely.
Late in the first quarter of 2012 the industry should enter "phase four" of the upturn, when semiconductor companies raise expectations on the back of continued improvement in order rates, Danely said. "We expect consensus estimates to rise in late 1Q12 as semiconductor companies raise guidance," he said.
According to Danely, the same four-stage upturn scenario he outlined occurred during the last downturn.
Last month, Jim Feldhan, president of Semico Research Corp., predicted the bottom of the current downturn would come in about February of 2012.
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