SECTOR WATCH: Semis Slide Into the Spotlight
By Frederic Ruffy, Optionetics.com
3/9/2005 4:15:00 PM
optionetics.com
Semiconductor stocks have been volatile this week. After opening with a rally on Monday, the group fell Tuesday following a disappointing mid-quarter update from Texas Instruments (TXN). Wednesday, the group staged another advance after Xilinx (XLNX) raised its sales forecast, but those gains proved short-lived, as the stock market took a tumble in afternoon trading. Two more events are on tap for Thursday. National Semiconductor (NSM) reports earnings. Then, in the most anticipated event of the week, Intel (INTC) will deliver its mid-quarter update after the closing bell.
So far this week, the news from the chip sector has been mixed. After the close of trading on Monday, Texas Instruments provided earnings and revenue guidance that fell short of expectations. The chipmaker said it expects first quarter revenues of $2.91 billion to $3.03 billion, compared to previous estimates of $2.9 billion to $3.14 billion. At the same time, earnings per share will be in the 22 to 24 cent range, compared to previous estimates of 22 cents to 26 cents. Shares fell more than $1.00, or 3.8%, to $26.34 on the news. Meanwhile, the PHLX Semiconductor Index ($SOX), which rose 6 points to 440 on Monday ahead of the report, gave back most of Monday’s gains following the news on Tuesday.
Wednesday morning, chip stocks once again bounced to the upside following an upbeat forecast from Xilinx. After the close of trading Tuesday, the chipmaker said fourth quarter sales could rise as much as 8% to $383.8 million. Wachovia Securities raised the rating on the stock to “outperform” from “market perform.” XLNX rose more than $1.00 to $32.50 a share on the news.
However, the gains on Wednesday didn’t last long. Due in large part to a sell off in the broader market, chip stocks fell and Xilinx finished the day down 19 cents to $31.27. The PHLX Semiconductor Index, which rose six points to more than 441 in early trading, gave back all of those gains and finished the day down 1.11 points to 434.33. Furthermore, the roller coaster ride in the chip sector might continue after Altera (ALTR) released a favorable earnings forecast after the close of trading Wednesday afternoon. The semiconductor equipment company said it expects first quarter to increase by 6%, compared to previous estimates of 1 to 3%. Shares rose 1.1% in after hours trading following the news and the strength could potentially spill over into the market action Thursday morning.
However, trading on Thursday might also be cautious ahead of earnings from National Semiconductor and a mid-quarter update from Intel. National Semiconductor will report profits during regular market hours. Analysts expect the company to post first quarter profits of 16 cents a share, compared to 23 cents a year ago, on sales of $445.5 million. Investors will be looking at the first quarter numbers and also guidance for the next quarter. On Monday, SG Cowen analysts said they expect National Semiconductor to give strong guidance for the second quarter that might be viewed as a positive for other analog device manufacturers. SG Cowen recommends buying TXN ahead of the news.
After the close of trading Thursday, the world's largest chipmaker will provide its mid-quarter update. Shares rose 4 cents to $24.84 Wednesday ahead of the report. INTC rose in early trading Wednesday after JP Morgan said that it expects Intel to raise revenue guidance to $9.0-$9.4 billion from $8.8 to $9.4 billion. The firm sees strong demand for laptop chips helping revenues. Similarly, AG Edwards also said on Tuesday they expect Intel to raise revenue guidance and/or gross margins. The firm reiterated INTC as a top pick. The stock is up 3.5% during the first six trading days in March.
In the options market, sentiment has also been bullish heading into Intel’s mid-quarter update. On Monday, for instance, more than 98,000 INTC calls traded, compared to 48,721 puts. Tuesday, calls outnumbered puts more than two to one (39,029 calls/18,371 puts). Wednesday, as the stock edged higher, the March at the money calls traded heavily. More than 29,000 of these contracts traded hands, compared to open interest of 94,010. The heavy volume and high open interest in these short-term at-the-money (25s) calls is a sign that many traders have been positioning for a move higher in INTC between now and March 18th, when these options expire.
Yet, although the recent options activity indicates that traders are optimistic heading into Intel’s midquarter update, the stage is set for disappointment if the chipmaker doesn’t deliver. Analysts have already raised expectations by suggesting that Intel will raise revenue guidance. The heavy call activity during the past three days also indicates that expectations are quite high. Therefore, given that the stock is up 3.5% during the six days leading up to the update, this could set up the possibility of a buy the rumor sell the news. In other words, even if Intel raises guidance, there is still the risk that the stock might fall.
Frederic Ruffy
Senior Writer & Index Strategist
Optionetics.com ~ Your Options Education Site
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