Analysts downgrade estimates for 10 chip companies

FBR's report came after Gartner, iSuppli, the SIA, and WSTS all lowered semiconductor industry sales estimates this month.

By Suzanne Deffree, Managing Editor, News -- Electronic News, 11/24/2008

In a report titled "Death by 1000 paper cuts: Cutting estimates and targets on most chip firms," FBR Capital Markets this morning downgraded its estimates for several semiconductor industry companies, including AMD, Maxim, and National Semiconductor.

"Global semiconductor demand trends are worsening faster than we can cut estimates. In an attempt to give investors a fresh look at likely revenue and earnings results for chip companies in this 'new world,' we are reassessing our financial forecasts, price targets, and ratings for all chip firms under coverage," Craig Berger and Robert Pikover, FBR semiconductor industry analysts, wrote in the report.

Berger and Pikover in the report cut revenue and EPS (earnings per share) forecasts and price targets for AMD, Atmel (ATML), Fairchild (FCS), International Rectifier (IRF), Linear Technology (LLTC), LSI, Marvell (MRVL), Maxim Integrated products (MXIM), National Semiconductor (NSM), and Silicon Labs (SLAB). Further, the analysts downgraded shares of LLTC, MXIM, and NSM by one rating level.

"While we do not like downgrading chip stocks after they have fallen so much, valuations on these names remain elevated versus peers. Further, visibility is not stabilizing or improving but rather deteriorating further, and we think these stocks could see additional downside risk or limited upside return in a stabilizing market," Berger and Pikover said.

FBR pointed to the global credit squeeze, which is causing chip customers to de-stock inventory at warehouses around the world as these customers "squeeze working capital requirements lower in order to horde cash." The distribution industry's inventory levels have been noted by several companies, including Fairchild and National Semi, in recent forecast revisions for their current quarters.

"Chip firms that recognize distributor revenues on a sell-in basis (ATML, AMD, FCS, IRF, MSCC, MXIM, and NSM at least partially recognize on sell-in) should see larger revenue declines than firms that recognize sales on a sell-through basis as distributors de-stock inventory," the analysts said.

"Generally, we think revenues for broadline chip firms (analog and discrete vendors) should fall by 20% to 30% from the shipment peak in Q3 to the shipment trough in Q1 2009 or Q2 2009. To the extent that Street estimates do not reflect such a revenue decline, those Street estimates likely need to be lowered," the analysts wrote.

FBR also noted company debt positions, management turnovers, the lack of "short-term fundamental catalysts," and the weakening PC and consumer electronics end markets among the reasons for making its revisions.

"Enterprise and corporate spending is just starting to decline as Wall Street's troubles spill over to Main Street. IT spending budgets for most firms should decline next year. While chip stocks are very inexpensively priced for longer-term investors, we do not yet have visibility into the bottom for chip firms, though we suspect that such a bottom may be found in Q2 2009," Berger and Pikover said.

Specifically for AMD, FBR cut its calendar 2009 revenue estimate from $5.8 billion to $5.4 billion, its calendar 2009 EPS estimate from a loss of $1.02 to a loss of $1.15, and its price target from $4.50 to $3.50. AMD's stock was trading at $1.82 around 10am eastern this morning.

For Atmel, FBR cut its calendar 2009 revenue estimate from $1.66 billion to $1.50 billion, its calendar 2009 EPS estimate from $0.37 to $0.02, and its price target from $6 to $4.75. ATML was trading at $3.22 around 10am.

For Fairchild, FBR cut its calendar 2009 revenue estimate from $1.40 billion to $1.30 billion, its calendar 2009 EPS estimate from $0.50 to $0.10, and its price target from $12 to $7. FCS was trading at $3.31 around 10am.

For IR, FBR cut its calendar 2009 revenue estimate from $740 million to $686 million, its calendar 2009 EPS estimate from a loss of $0.56 to a loss of $0.77, and its price target from $22 to $17. IRF was trading at $10.35 around 10am.

For Linear, FBR cut its calendar 2009 revenue estimate from $1.13 billion to $966 million, its calendar 2009 EPS estimate from $1.50 to $1.10, its price target from $26 to $16, and its rating from "Market Perform" to "Underperform." LLTC was trading at $18.84 around 10am.

For LSI, FBR cut its calendar 2009 revenue estimate from $2.76 billion to $2.45 billion, its calendar 2009 EPS estimate from $0.30 to $0.18, and its price target from $5 to $4.50. LSI's stock was trading at $2.63 around 10am.

For Marvell, FBR cut its calendar 2009 revenue estimate from $3.02 billion to $2.88 billion, its calendar 2009 EPS estimate from $0.62 to $0.60, and its price target from $13 to $11. MRVL was trading at $5.23 around 10am.
For Maxim, FBR cut its calendar 2009 revenue estimate from $1.80 billion to $1.63 billion, its calendar 2009 EPS estimate from $0.85 to $0.55, its price target from $14 to $10, and its rating from "Market Perform" to "Underperform." MXIM was trading at $11.84 around 10am.

For National Semi, FBR cut its calendar 2009 revenue estimate from $1.78 billion to $1.58 billion, its calendar 2009 EPS estimate from $1.05 to $0.72, its price target from $14 to $10, and our rating from "Outperform" to "Market Perform." NSM was trading at $10.15 around 10am.

And for Silicon Labs, FBR cut its calendar 2009 revenue estimate from $462 million to $429 million, its calendar 2009 EPS estimate from $1.75 to $1.50, and its price target from $39 to $35. SLAB was trading at $18.95 around 10am.

FBR's report came after Gartner, iSuppli, the Semiconductor Industry Association, and WSTS all lowered semiconductor industry sales estimates this month.