Communications Chips Are Focus
As Investors Study Chip Sector
By DONNA FUSCALDO
Dow Jones Newswires
Despite a revenue shortfall warning from chip giant Intel Corp., U.S. semiconductor makers and their suppliers are expected to meet Wall Street views for the just-ended third quarter.
But this will be the first time that communications-chip stocks, and not microprocessor stocks, will serve as an indicator of the overall health of the market.
Historically, Intel was viewed as the "technology bellwether," providing insight into where the semiconductor market was heading. But as communications devices gain in popularity and concerns over demand for personal computers accelerate, the communications-chip stocks are expected to have the most growth and visibility.
Fueled mainly by those stocks, analysts expect profits for companies on the Dow Jones Semiconductor Index to surge an average of 100% from the year-ago third quarter, according to First Call/Thomson Financial.
"Now more than ever it's important for the market not to use microprocessors as the bellwethers for the whole industry," said Merrill Lynch & Co. analyst Joseph Osha. "Again and again we see that happening, even though we are seeing more growth from communications, both wireless and wire line."
Several Concerns
Indeed, the performance of microprocessor companies has come into question in the September quarter. Concerns over demand for PCs, coupled with component shortages in the earlier part of the quarter, have left most confused about the performance of chip stocks. And concerns have only intensified since Intel warned that revenue would only grow 3% to 5%, compared with the revenue growth of 8% to 12% that analysts had been expecting.
"Relative to expectations, we have seen a pretty slow pickup in demand for microprocessors in September," said Mr. Osha. "Normally this time of the year is when things get better, which is not evident in the past four weeks."
Mr. Osha said that part of the reason Intel had to adjust expectations was that it had "analysts vying with each other to see who could be the most bullish." Mr. Osha is expecting Intel to come in at 39 cents a share, on revenue of $8.6 billion, when it reports on Oct. 17.
Analysts, according to First Call, expect Intel, of Santa Clara, Calif., to weigh in with earnings of 38 cents a share, compared with last year's 28 cents (adjusted for a 2-for-1 stock split in July).
Jack Geraghty, an analyst at Gerard Klauer Mattison, said that Intel could surprise a little in the "other-income" line, but that revenue will probably be in line with the revised guidance. He is expecting Intel to post earnings of 38 cents a share on revenue of $8.4 billion.
Dropping DRAM Prices
On top of concerns about PC demand, spot prices for dynamic random access memory, or DRAM, have fallen dramatically in recent weeks, leading to even more questions about the overall health of the PC market. Skittish investors will surely look to Micron Technology Inc., a Boise, Idaho, memory-chip maker, to gauge the health of chips.
The company, which reports earnings on Wednesday, is expected to beat estimates. Micron is reporting its fiscal year end quarter, which ended in August, when DRAM prices looked good, said Scott Randall, an analyst at Wit SoundView.
Mr. Randall is expecting Micron to post earnings of 95 cents a share on revenue of just under $2.5 billion. Wall Street has a target of 96 cents a share, compared with a loss of 4 cents a year earlier.
Sudeep Balain, an analyst at Chase H&Q, expects Micron to post "record earnings for the fourth quarter." He said that less than 5% of its DRAM is sold in the spot market.
As for chip giant Advanced Micro Devices Inc. Mr. Osha said it has more of a chance of meeting estimates because expectations weren't as high as they were for Intel. He is forecasting AMD to come in at 60 cents a share on revenue of $1.239 billion, when it reports on Oct. 11. First Call has AMD weighing in at 62 cents a share, compared with a loss of 36 cents a share in the year earlier period.
Communications Chips Look Strong
In the white-hot communications-chip sector, industry watchers said investors should benefit from a combination of the cycle not being over and from longer-term underlying trends in communications. Although Merrill's Mr. Osha is bullish on the sector, he said there won't be many big surprises because of current expectations.
However, Alex Gauna, an analyst at Banc of America Securities, said communications-chip companies Applied Micro Circuits Corp., Broadcom Corp. and PMC-Sierra Inc. will exceed estimates and provide strong guidance going forward. These companies are on track to have consistent demand since they have been taking orders well into the March quarter, he said.
For semiconductor test company Teradyne Inc., investors will be looking at order bookings rather than earnings. Orders are coming up weaker than what was expected for this quarter, said Eric Ross, an analyst at Thomas Weisel Partners. Outsource test manufacturers ordered a lot in the first quarter, didn't need to order in the second quarter and didn't pick up ordering in the third quarter, he said.
And weak PC demand, in a seasonally strong quarter, has exacerbated the situation, said Mr. Ross. He had originally expected Teradyne to record 900 million orders, but cut that to 800 million. The analyst, who is expecting Teradyne to post earnings of 80 cents a share on revenue of $820 million when it reports Oct. 17, said orders should pick up in the fourth quarter. First Call has Teradyne coming in at 84 cents a share, compared with 35 cents a year earlier. |
