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Chip stocks are outperforming (SOXX +1.1%) after Avago (AVGO +5.1%) posted an FQ1 beat and strong margin numbers (albeit while guiding light, as many expected), and STMicroelectronics (STM +3.9%) exec Paul Grimme states his company's European sales are stabilizing, with Germany leading the way.
Notable winners: AMBA +5.4%. AMCC +5.2%. CRUS +3.3%. SWKS +3%. QUIK +4.1%. INVN +2.7%. RFMD +3.5%. TQNT +3%. SIMO +2.7%. CAVM +3.6%. Nearly all of the aforementioned names have strong mobile and/or telecom equipment exposure.
RBC has hiked its Avago PT to $66 from $64, and says the chipmaker remains its "top play on China and global LTE deployments." With LSI in tow, the firm thinks FY15 (ends Oct. '15) EPS will top $5.
Morgan Stanley ($68 PT) is confident Avago can raise LSI's op. margin to 30% from 17% over the next few years, much as the company has doubled its own op. margin to 30% post-LBO.
PC industry names outperformed amid a broader tech rally, aided by a JPMorgan Intel (INTC +4%) note that argued PC demand is stabilizing, and tablet cannibalization diminishing. A number of chip stocks also rallied strongly (SOXX +2.1%).
Also: Major hard drive suspension assembly maker Hutchinson has reported above-consensus Dec. quarter sales, while citing strong demand for 2.5" notebook drive assemblies. Seagate and Western Digital both rallied.
JPMorgan's Christopher Danely, who upgraded Intel to Overweight, has raised his 2014 estimates soundly above consensus ahead of the chip giant's Thursday Q4 report. Danely notes Intel, Microsoft, H-P, and others have said PC demand is improving, and that Taiwan's big-4 notebook contract manufacturers collectively grew their shipments 7% Q/Q in Q4. Q1 shipments are expected to drop in-line with seasonality.
He also points out tablet shipment growth is decelerating, and forecasts shipments will only rise 25% in 2014 (down from 53% in 2013).
Danely's optimism contrasts with another bearish Intel note from Bernstein's Stacy Rasgon, who estimates five mobile CPU sales are needed to make up for one PC CPU sale, and doubts Intel's foundry business will move the needle.
Avago (AVGO +7.6%) is now up 18% (good for a $2.1B increase in market cap) since announcing a $6.6B deal to acquire LSI yesterday morning. Many of its chip industry peers have also rallied; the Philadelphia Semiconductor Index (SOXX +1.2%) is up 2.5% over the last two days.
The sharply contrasting nature of Avago and LSI's product lines - Avago depends heavily on RF and optical component sales, while LSI depends on storage controllers/adapters and network processors - could be fueling hopes other chipmakers will use M&A to expand their product lines and achieve greater scale.
Today's notable gainers include EZchip (EZCH +6.7%), OmniVision (OVTI +3.6%), Skyworks (SWKS +3%), Cavium (CAVM +3%), Audience (ADNC +5.8%), Cirrus Logic (CRUS +3.4%), and Semtech (SMTC +3%). Cirrus and OmniVision, which both depend heavily on Apple orders, might also be getting a boost from a positive Q4 pre-announcement from Germany's Dialog Semi (gets ~70% of its sales from Apple).
Several firms have hiked their Avago PTs in response to the LSI deal, which is set to be financed with $4.6B in debt and a $1B convertible note investment from Silver Lake (conversion price of just $48.04). Nomura expects the deal to lift Avago's 2015 EPS by $1.00-$1.50; Avago is promising $200M/year in synergies by the end of FY15 (ends Nov. '15). RBC thinks FY15 EPS of ~$5 is possible; the consensus is at $3.89.
TSMC (TSM -1.8%), estimated to have ~50% of the global chip foundry services market, thinks the market's growth will slow to 9% in 2014 from 11% in 2013. At the same time, the company thinks total chip industry growth will increase to 5% from 2013's 4%. Trade association WSTS has forecast 4.4% 2013 growth and 4.1% 2014 growth.
Foundries have been steadily growing their share of chip industry output for years, as the exorbitant cost of building new fabs leads more and more chipmakers to outsource manufacturing. But with dozens of major chipmakers already fully relying on foundries, the market could be hard-pressed to significantly outpace broader industry growth going forward.
Weaker-than-expected guidance from Broadcom, Altera, RF Micro, and STMicroelectronics has fueled a general selloff in chip stocks (SOXX -3.5%). Companies with strong mobile and/or telecom infrastructure exposure are seeing an outsized share of the damage.
The numbers call into question the strength of year-end demand from consumer electronics, enterprise hardware, and telecom equipment firms, and make a recent Wells Fargo downgrade of the sector look smart.
Wells Fargo's David Wong has cut his rating for the semiconductor industry to Market Perform, citing Intel and TSMC's (TSM +1.6%) Q4 guidance, and downbeat commentary from tech companies about electronics demand. That, along with an adverse reaction to AMD's Q3 numbers and Q4 guidance, is leading chip stocks to underperform (SOXX -0.2%) on a day when Internet stocks are flying higher thanks to Google.
Intel's guidance for seasonally strong Q4 implies only a 2% Q/Q sales increase at the midpoint. TSMC, which delivered its Q3 results yesterday, is guiding for Q4 revenue to fall to NT$144B-$147B ($4.9B-$5B) from Q3's NT$162.58B ($5.53B).
Though Q4 tends to be seasonally weak for foundries, TSMC did partly attribute its guidance to customer inventory adjustments and softening high-end mobile device demand.
Wong's downgrade is accompanied by ratings cuts for analog chipmakers International Rectifier and Monolithic Power. It comes two weeks after trade association SIA reported global chip sales rose 6.4% Y/Y in August; that was the fastest growth rate posted since March '11.
Trade association SIA estimates global chip sales rose 1.3% M/M and 6.4% Y/Y in August, the Y/Y figure represents not only an improvement from July's 5.1%, but the highest growth rate seen since March '11.
While strong memory chip sales (aided by mobile demand and favorable pricing) naturally contributed to the growth, SIA says demand for non-memory products also rose. The growth comes in spite of soft demand for PCs, home electronics, and servers.
CEVA (CEVA -12.8%) is ending the day with huge losses after Broadcom, which uses CEVA's DSP cores in its baseband chips, missed Q2 estimates and issued light Q3 guidance, while blaming the shortfall in large part on light baseband sales. Chip stocks on the whole have had a bad day (SOXX -1.8%), as Broadcom's numbers and a ho-hum report from ARM overshadow Apple's FQ3 beat. SIMG -3.8%. OVTI -2.8%. MU -3.9%. SNDK -2.4%. IMOS -4.5%. Broadcom set-top chip rival STMicroelectronics (STM -2.7%) has fallen for the second day in a row following its Q2 report and soft Q3 guidance, aided by a downgrade to Underperform from BofA.
Global chip sales rose 3.4% M/M in May, per the SIA's latest data. On a 3-month rolling average basis, they rose 4.6% M/M but just 1.3% Y/Y. Analysts are generally pleased. Though Evercore still expects a weak 2H, JPMorgan (6% 2013 growth forecast) notes sales are picking up following a weak Q1; Wedbush thinks both the data and its own checks suggest a chip recovery "continues at a healthy and steady pace;" and Wells Fargo (8%-10% 2013 forecast) likes the fact IC sales rose 6% Y/Y. Wells adds the ratio of chip equipment sales to IC sales remains low at 14%, which suggests equipment orders will eventually pick up. Chip equipment makers: AMAT, KLAC, LRCX, ASML, UTEK, RTEC. (Gartner)
Chip stocks outperform (SOXX +1.4%) after Microchip raises its June quarter guidance, and STMicroelectronics raises its 2013 guidance. Microchip rivals Texas Instruments (TXN +2.6%), Atmel (ATML +3.4%), and Freescale (FSL +2.1%) are among the winners, as is STMicroelectronics rival NXP (NXPI +3.6%). Also, Altera (ALTR +2.5%) is rallying with the help of an upgrade to Buy from Argus, and Intersil (ISIL +2.4%) is benefiting from a bullish coverage launch from Piper. Some chip ETFs: SMH, XSD, PSI, SOXL, USD, SOXS, SSG.
Microchip (MCHP) +4.5% after raising its FQ1 (ends June 30) guidance. The microcontroller vendor now expects 4%-7% Q/Q sales growth and EPS of $0.52-$0.56; that's better than prior guidance of 2%-6% growth and EPS of $0.50-$0.54, and largely above a consensus of $447.7M and $0.52. Microchip, often seen as a bellwether for chip stocks (SOXX, SMH), says it has "continued to see a very strong bookings and business environment," has "received excellent visibility" from customers, and is returning employees to work faster than expected to keep inventories from falling too low. Microchip's guidance hike comes after the SIA estimated chip sales fell 10% M/M in March, better than a historical drop of 15.3%.
Look for any piece of news that smacks of an improving economy to send stocks falling next week, warns CNBC's Jim Cramer. Why? Big money investors will interpret any positive economic signs as a signal that the Fed is about to pull back economic stimulus rather than risk runaway inflation. Still, he says, there may be opportunities in the pullback, particularly in the bank, tech and industrial spaces. Just says away from anything with a higher yield, like utilities and MLP's.
Chip stocks close with solid gains (SOXX +1.5%) after Avago beats April quarter estimates and makes encouraging comments about mobile, industrial, and enterprise networking demand. In addition to Avago's rivals and Cirrus Logic (previous), big winners include Fairchild (FCS +3.8%), SanDisk (SNDK +2.7%), Spreadtrum (SPRD +7.2%), and InvenSense (INVN +4.9%), as well as touchscreen controller suppliers Synaptics (SYNA +4.3%), Atmel (ATML +6.3%), and Cypress (CY +2.8%).
Samsung Electronics (SSNLF.PK) says its Q1 profit rose 42% to a record high on strong smartphone sales. Net profit rose to a record KRW7.15T ($6.4B), up from KRW5.05T a year earlier. Operating profit rose 54% to KRW8.8T from KRW5.7T. Sales rose 16.8% to KRW52.9T from KRW45.3T, coming in in line with the company's guidance of KRW51T to KRW53T. The results stand in stark contrast those of Apple (AAPL), which earlier this week reported its first profit drop in a decade and forecast margins to decline in the current quarter ending in June.