Semiconductor stocks should continue to Appreciate

Published:2012/2/12 21:38:00 Author:Phyllis From:SeekIC

Semiconductor stocks should continue to appreciate until at least early summer, now that business is picking up and the chip market upturn has entered a new phase.

According to a recent report, many semiconductor companies and distributors, including Texas Instruments Inc., Microchip Technology Inc., Xilinx Inc. and Arrow Electronics Inc. have stated that their bookings have increased since mid-December. Data from the Semiconductor Industry Association also indicated that chip sales increased more than the seasonal average in December compared with November.

The Philadelphia Stock Exchange’s SOX semiconductor index has appreciated 27% since he called a bottom to the industry downturn in mid-September, well above the 16% gain posted by the S&P 500 in that timeframe. Despite the move in the SOX, it is believed that the majority of upside to consensus estimates is in front of us as semiconductors are still under-shipping demand by at least 10%.

The semiconductor market has now entered the third phase of the industry upturn, with chip companies report improving order rates due to inventory replenishment. Most companies are expected to reiterate that order rates are improving throughout the quarter. In the fourth phase of the upturn, semiconductor companies will begin raising sales and earnings targets due to continued improvement in orders.

While a number of investors have expressed concern that based on the 27% improvement in the SOX since September, an upturn is already priced into current chip stock valuations.

There is still plenty of upside remaining as semiconductors are under-shipping end demand by more than 10%. It is predicted that order rates will continue to improve in the first half of 2012 due to inventory replenishment as demand now appears stable.

In 2007 the chip inventory replenishment cycle last two quarters as the SOX improved 39% from a July 2006 bottom. It is expected this time at least two quarters of semiconductor inventory replenishment despite the end demand does not improve.

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