Earnings estimates for Intel, IR, others still too high, analysts say

FBR analysts project a fundamental bottom should form in the first half of 2009 and that distributors will replenish component inventories sometime this summer, providing an industry catalyst in the second half.

By Suzanne Deffree, Managing Editor, News -- Electronic News, 1/6/2009

There have been major reductions to estimates across the semiconductor industry since November 2008, but some analysts believe the expectations are still too high.

"Despite the barrage of chip firm preannouncements in Q4 2008, we believe various firms still have earnings estimates that are too high," Craig Berger and Robert Pikover, semiconductor industry analysts at FBR Capital Markets, said in a report this morning. "Specifically, we think Q4 2008 Street estimates are at risk for International Rectifier, Intel, Linear Technology, and Maxim. Interestingly enough, except for Intel, none of these firms negatively pre-announced Q4 results, and business conditions have materially weakened in our opinion since original guidance was issued."

Indeed, Intel in mid-November lowered its Q4 guidance, estimating sales could be down as much as 15% on its Q3 results. That downward revision was expected, as Intel forecasted for Q4 early in the earnings season in mid-October and the financial crisis had forced much change in the market in the month between. Intel's revised Q4 estimate calls for sales at a mid-point of $9 billion.

FBR expects Q4 sales at the MPU leader to come in at $8.69 billion, slightly worse than the Street's estimate of $8.74 billion.

"For Q1, we think the firm could guide revenues to a range of $7.6 billion to $8.2 billion, driving a midpoint of $7.9 billion, worse than the Street estimate of $8 billion," Berger and Pikover said. "Specifically, we forecast Q1 sales of $7.81 billion and [earnings per share] of $0.13, worse than the Street estimate at $0.16."

Looking to the current quarter, FBR said estimates at International Rectifier, Intel, Linear, Marvell, Maxim, Microsemi, and Nvidia are most at risk.

"Separately, in forecasting financial performance for chip firms, we think it is appropriate to anticipate a 25% peak to trough revenue compression during this downcycle, with product cycle firms (Silicon Labs, Broadcom) likely to do better than that, while broad-based firms with 'sell-in' revenue recognition will likely do worse than that (National Semiconductor, Fairchild, Atmel)," Berger and Pikover said.

FBR has noted in pervious reports that companies that recognize distributor revenues on a sell-in basis are at higher risk for revenue declines than those companies that recognize sales on a sell-through basis as component distributors de-stock inventory during this downturn. FBR recently did so when downgrading estimates for 10 chip companies in November. 

Of FBR's "outperform" names, Berger and Pikover said they expect strength in ON Semiconductor, Marvell, and Microsemi. The analysts also noted preferred "longs," in order of preference, in Silicon Labs, IR, Broadcom, Fairchild, and Atmel. They said underperformers include Linear and Maxim.

"We believe a fundamental bottom should form in [the first half of 2009], and that distributors will replenish component inventories sometime this summer, providing an industry catalyst in [the second half]," the analyst said.