Chip Industry Starting to Recover

The chip industry is showing signs of recovery as 3 different sets of data show.

On Monday afternoon, Texas Instruments (TXN - Analyst Report) raised its second-quarter guidance. Revenues should total between $2.3 billion to $2.5 billion, versus the previous forecast of $1.95 billion to $2.40 billion. Earnings should be between 14 cents and 22 cents per share, versus the previous forecast of 1 cent to 15 cents.

On Tuesday, SEMI (a chip industry association) said its book-to-bill ratio rose for the third consecutive month, reaching 0.65.

Full-year earnings estimates for Electronic Computer-Semiconductor continue to be revised higher. Over the past 4 weeks, 126 estimates have been raised and 32 have been cut - a revisions ratio of 3.94.

Firms recently favored by brokerage analysts include:

• Analog Devices (ADI - Analyst Report) - 18 positive revisions and no cuts
• Cree (CREE - Analyst Report) - 6 positive revisions and no cuts
• Marvell Technology Group (MRVL - Snapshot Report) - 17 positive revisions and no cuts
• Semtech (SMTC - Analyst Report) - 6 positive revisions and no cuts

(All 4 are Zacks #2 Rank ("buy") stocks. TXN is a Zacks #3 Rank ("hold") stock, mostly because many of the 33 covering analysts have yet to adjust their forecsats in response to the new guidance.)

Building On The Trend We Spotted In March

Last March, I discussed how earnings estimates had shifted from being negative to positive. (Read Are Chipmakers Finally Stabilizing?)

Since then, the pace of economic deterioration has slowed. This shift towards stabilization has helped both PC and cell phone sales. At the same time, chipmakers have maintained their focus on controlling inventory levels.

Inventory has been a big issue for the industry. Chipmakers created too much supply, driving down prices at a time when demand was falling. Now, we are starting to hear better news about margins. (e.g. CREE's fiscal-third gross margins were essentially flat on a quarterly sequential basis and the company recently predicted that fiscal fourth-quarter margins would be at the "higher end of previously targeted levels" )

Not Out Of The Woods, Yet

Though the news is good, it is important to realize that the chip industry is only in the initial stages of a recovery. April sales were down 25% from a year prior and the Semiconductor Industry Association expects full-year sales to be down 21.3%.

Furthermore, even though conditions for the chip industry are clearly better than they were early this year, rising foreclosures and credit card defaults will hurt end-user demand.

Finally, optimism about a rebound has sent shares of semiconductor stocks higher. S&P Semiconductor SPDR (XSD) has appreciated by 30% from the last time I wrote about chip stocks in late March.

The continued trend of upward revisions, however, suggests that chip stocks are likely to outperform over the next 1-3 months.

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.