Q2 Results Show Chip Recovery

Twice in this column, I have said that the chip industry is in the early stages of a recovery. Second-quarter results, and the earnings estimate revisions in response to them, have so far proven my assessment to be correct.

During the month of July, 247 full-year profit forecasts were raised on companies within Electronic Computer-Semiconductor, the most of any group. In more tangible terms, analysts have increased their earnings projections on 55 chip makers.

The positive revisions follow many better-than-expected profit reports. Though revenues and earnings were down from a year ago, many companies said revenues increased from the prior quarter. For example, Broadcom (BRCM - Analyst Report) experienced an 18% rebound in revenues from the first quarter and Fairchild Semiconductor (FCS - Snapshot Report) saw a 25% increase.

At the same time, inventories declined for many companies. Intel (INTC - Analyst Report), for instance, reported an approximate 8% drop in inventory levels. This is a big positive because excessive stockpiles had been one of the industry's key headwinds.

Obviously, the other big headwind is demand. The overall tone from the earnings reports and conference calls has been cautious optimism. Linear Technology's (LLTC - Analyst Report) CEO, Lothar Maier, observed that "customers have become more consistent in their ordering patterns."

Earnings Estimates Factoring More Than Just Positive Surprises

The biggest question to ask, however, is whether analysts believe the second-quarter momentum is sustainable.

A good way to determine the answer is to look at the changes in the Zacks Consensus Estimate. Specifically, you want see a positive revision in the full-year earnings estimate that is greater than the most recent quarterly surprise. If analysts don't raise their projections beyond the magnitude of the surprise, they are basically saying that earnings momentum won't continue.

In the case of the chipmakers, analysts do think the bullish momentum will continue:

• Broadcom (BRCM - Analyst Report) - beat by 3 cents, full-year forecasts revised up by 25 cents
• Fairchild Semiconductor (FCS - Snapshot Report) - beat by 8 cents, full-year forecasts revised up by 21 cents
• Cypress Semiconductor (CY - Analyst Report) - beat by 10 cents, full-year forecasts revised up by 32 cents
• Linear Technology (LLTC - Analyst Report) - beat by 3 cents, fiscal 2010 full-year forecasts revised up by 5 cents
• Texas Instruments (TXN - Analyst Report) - beat by 6 cents, full-year forecasts revised up by 13 cents
• Intel (INTC - Analyst Report) - beat by 11 cents, 2009 full-year forecasts 1 cent higher; however, 35 analysts raised 2010 estimates, sending the Zacks Consensus Estimate 24 cents higher to $1.10 per share.

FCS is a Zacks #1 Rank ("strong buy") stock. CY, LLTC and TXN are Zacks #2 Rank ("buy") stocks. BRCM and INTC are Zacks #3 Rank ("hold") stocks.

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 holds a position in iShares Semiconductor (IGW) in Zacks ETF Trader.

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

Read the full analyst report on LLTC

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Read the full analyst report on CY

Read the full analyst report on BRCM

Read the full analyst report on TXN

Read the full analyst report on FSC