Are Chipmakers Finally Stabilizing?

Much to my surprise, I'm seeing reasons to not be so pessimistic toward semiconductor companies.

The biggest is the trend in earnings estimate revisions. Six weeks ago, I said that "chip companies have seen approximately 400 earnings estimates cut". The number of falling forecasts has since declined to just 62. (Both numbers reflect revisions made over the preceding 4-week period.)

Some of this decline can be attributed to the fact that we are between fourth- and first-quarter earnings season. Typically, the number of earnings estimate revisions, both positive and negative, declines significantly during this time of year.

What can't be explained by the calendar, however, is the fact that 88 earnings estimates have recently been revised upwards on chip companies. In other words, there are now more positive revisions than negative revisions - a sharp change from early February.

This is not to say that industry conditions have improved; they haven't.

In early March, the Semiconductor Industry Association (SIA) said that January worldwide sales were down 28.6% from a year prior. A few days later, Marvel Technology (MRVL - Snapshot Report) said it does not expect conditions to improve over the short-term. Not to mention the fact that the economy continues to contract.

First-quarter earnings won't be good either. Every chipmaker in the S&P 500 (SPX) is projected to report at least a double-digit drop in profits.

So Why The Optimism?

Semiconductor companies have been responding to the difficult industry conditions by continuing to cut costs. For instance, MRVL is reducing its workforce by 15%. Intel Corporation (INTC - Analyst Report) is freezing salaries.

There also could be a sense among brokerage analysts that conditions are nearing a bottom.

Worldwide revenues are at their lowest level in more than 4 years. Though semiconductor prices have dropped, usage of chips has increased. Consider the explosion in wireless devices that has been occurring. Not to mention the rise in devices that use flash cards, such as digital cameras and music-playing phones.

Inventory levels have also declined and at some point will be low enough to allow the industry to recover.

Still Early, However

Though these are positive signs, it is important to realize that the chip companies still have a long way to go. Even the estimate revisions, though positive, are not that impressive.

Nearly half of the positive revisions made recently are for just 4 companies: MRVL, INTC, Altera Corporation (ALTR - Analyst Report) and Texas Instruments (TXN - Analyst Report).

The fiscal 2009 profit projection for MRVL has the company earning 6 cents per share. Though an improvement from a month ago, when the consensus estimate called for a loss of 11 cents per share, it is still well below what analysts were projecting at the start of 2009.

Similarly, changes in forecasts for ALTR, INTC and TXN have stemmed the trend of negative revisions, but not much else.

So, I'm not prepared to make a bullish call about the semiconductor industry. But, there does appear to be some stabilization. Whether this is truly the bottom, however, remains to be seen.

Related ETFs

There are several ETFs that directly track the semiconductor industry. Semiconductor HOLDRS (SMH) has an approximate 45% allocation to INTC and TXN. Alternatively, S&P Semiconductor SPDR (XSD) is more diversified with no stock accounting for more than 5% of its holding.

Zacks Premium and Zacks Elite subscribers can view the Zacks Industry Rank List at http://www.zacks.com/zrank/zrank_inds.php. This interactive list allows you to see all of the companies, and their Zacks Rank, within more than 200 industries. Shown below is the Zacks Sector Rank List, which shows the trend in estimate revisions on a broader scale.

Charles Rotblut, CFA, is the senior market analyst for Zacks.com. He can be reached at crotblut@zacks.com.