Intel Corp (INTC)

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Chips: Street Sees In-Line Q2, Uncertainty Beyond That
By Tiernan Ray

A number of Street observers today weighed in on the state of the semiconductor industry, before more dispiriting personal computer data points were revealed this afternoon by Gartner and IDC.

The reports were already featured a strong element of caution about the personal computer industry, and a tendency to hope other areas such as tablet computers might offset things. The overall view is that the June quarter looks like it will meet expectations, and things are less certain the rest of the year.

Barry Danaher and Paul Peterson of BlueFin Research Partners write that a semiconductor recovery is approaching its finale, and that while most chip makers may report the June quarter in line with expectations, Q3 will probably be disappointing given “sub-seasonal growth in PC, smartphone markets,” and the inventory replenishment of industrial chip markets:

We’re now two quarters into a mild semiconductor recovery after a sharp inventory correction in 2012. Demand improved in the June quarter, but we did not see the order surge and foundry expedites that occurred last year, as customers and suppliers are behaving more rationally this year. Many believed that the recovery was gaining steam during the quarter, pointing to the recently released Semiconductor Industry Association (SIA) data that showed May revenues spiking above the trend-line on a year-over-year basis. However, much of this reported growth was due to rising NAND and DRAM pricing associated with tight capacity. In fact, we believe growth is decelerating in the industrial and automotive markets, as inventory replenishment almost certainly contributed to the strong growth in the front half of the year.

Oppenheimer & Co.’s Rick Schafer writes that “We expect the majority of semi names to deliver in-line 2Q results and guide 3Q in line with consensus.”

Schafer doesn’t think an in-line Q2 will do much for the stocks:

We see in-line earnings as an unlikely positive stock catalyst and believe the group could trade lower. Group fundamentals continue to improve at a checked pace, with still lean channel/customer inventories and more rational growth expectations reducing the risk of another 2H head-fake. PC, our long-standing least-favorite vertical, has continued to underwhelm as secular decline accelerates. Even in a “back-half-loaded” year, we model 2013 PC units down 10%. Recent years have proven a departure from “normal” seasonality, and absent any go-to consumer products, we expect a more evenly split 1H:2H year for semis as a whole.

Schafer advises leaning toward those chip makers more broadly exposed to tablet computer sales, and to Apple (AAPL) in particular including Broadcom (BRCM), RF Micro Devices (RFMD), and Skyworks Solutions (SWKS). He advises avoiding non-Apple names such as Maxim Integrated Technology (MXIM) and Semtech (SMTC).

Nomura Equity Research’s Romit Shah weighed in on the prospects for Intel (INTC), whose shares he rates “Reduce,” with an $18 price target. Shah raised his estimates for the current quarter to 50 cents from 47 cents previously, and raised his year outlook to $1.84 from $1.75, based on an expectation of a reversal of prior quarters’ inventory reserves:

We expect gross margin to improve from 58.0% in Q2 to 61.5% in Q3 and 63.0% in Q4. One of the biggest drivers is the reversal of inventory reserves […] Between 4Q12 and 2Q13E, we estimate that Intel will record inventory reserves of 300bps (Figures 1 and 2). Those charges should largely reverse over the next two periods. In other words, Intel should benefit from the sale of previously written-off inventory to the tune of 150bps per quarter. In addition, Intel should recoup 450bps in startup costs over 2H13.

Shah thinks Intel may forecast Q3 revenue of $13.5 billion, below consensus of $13.7 billion, given he thinks “uptake of Haswell has been lower than the company’s expectations.”

On a more positive note than the others, Wells Fargo’s Patrick Wang thinks there’s upside for chip makers based on what he projects will be firm results from their contract chip manufacturers, Taiwan Semiconductor Manufacturing (TSM), and United Microelectronics (UMC):

Taiwanese foundry composite (TSMC + UMC) revenues increased 4% month- over-month in June (in USD terms), following an increase of 3% in May. On a year-over-year basis sales were up 22% in June, following an increase of 13% in May. Within the composite, UMC’s sales increased 3% month to month while TSMC’s sales increased 4% (in USD terms). Based on the combined monthly sales for the June quarter, we calculate that TSMC’s June quarter sales were NT$155.9 billion, toward the top of TSMC’s original guidance range for sales of NT$154-156 billion. UMC’s sales grew 15% sequentially, above UMC’s original guidance for sequential growth of about 13%. We take this to be an indication that fabless chip companies as a group continued to see improving demand for their products through the June quarter, building our confidence that upcoming June quarter reports from many chip companies will reflect revenues that are in line with or above the midpoint of original guidance […] Guidance midpoints imply 5% sequential growth expectation in June for Broadcom, 2% for AMD, 3% for Xilinx, 2% for Altera and 2% for Nvidia in its July quarter (Nvidia expects 7% sequential growth for its GPU segment). Qualcomm however expects its chipset unit shipments will be flat to down 6% sequentially in the June quarter.
http://blogs.barrons.com/techtraderdaily/2013/07/10/chips-street-sees-in-line-q2-uncertainty-beyond-that/