Good News and Timing Have Investors Choosing Comm Chips

Chip investors are getting itchy.

A combination of positive economic indicators, a critical support point in the movement of the Philadelphia Stock Exchange Semiconductor index and good quarterly updates from Texas Instruments(TXN Quote), Xilinx(XLNX Quote) and Altera(ALTR Quote) have investors buying up communications chip makers. On top of that, the Semiconductor Industry Association put out January numbers Tuesday morning that included a sequential decline in business from December but signaled a much more favorable year-over-year comparison than the chip industry has seen in many moons. There's nothing individually earth-shattering to boost component makers, but taken together there is enough to convince chip investors on the verge to pull the trigger.

Tuesday a motley gang comprised of Vitesse(VTSS Quote) (+8%), Broadcom(BRCM Quote)(+7%), Anadigics(ANAD Quote) (+8%), Applied Microcircuits(AMCC Quote) (+4%) and Lattice Semiconductor(LSCC Quote) (+5%) maintained strong moves into positive territory. Not quite implicated in last week's Altera(ALTR Quote) mid-quarter update or Xilinx's(XLNX Quote) upside preceding guidance revision, the companies benefit nonetheless from the revelation that inventories at customers such asCisco(CSCO Quote) have finally cleared.

Morgan Wedbush's David Wu insists that there's no pickup in communications end markets driving the stock moves. "Cisco, Lucent(LU Quote), Nortel(NT Quote), Juniper(JNPR Quote) -- none of them are saying great things," he explains, which leads him to believe that sequential progress in revenue means inventory has cleared out of those vendors' warehouses. Given that investors have been ready for months to jump in once signs of a chip recovery appear, the end to the inventory glut has spurred some investors to action.

Meanwhile, over at the SIA, the chip sector got what passes for upbeat news these days as January 2002 sales declined a mere 39% compared to January 2001. Chip sales of $10.01 billion slipped 1.8% from December, when the year-over-year comparison showed a 43% drop. In the past three months, worldwide chip sales have slowed from $10.6 billion to $10.18 billion to January's $10 billion. It's not quite a bottom, but the SIA is looking for sales to start climbing again sequentially by the second quarter of 2002.

Additionally, Texas Instruments pronounced results from January and February "strong" in a Monday night keynote speech at the Morgan Stanley Semiconductor and Systems conference, pushing smaller mobile-phone component makers TriQuint (TQNT Quote) and RF Microdevices (RFMD Quote) up more than 6% each Tuesday. TI confirmed its first-quarter guidance of flat sequential revenue, which it has done several times so far in the quarter. It was the idea that business might be good enough to propel it past guidance that inspired investors. TI shares ended the day with no gain.

From a technical standpoint, the recent upward climb of the SOX index has capitalized on and added to the momentum. Despite declines last week, the semiconductor-tracking index held crucial levels near where the index topped out before Sept. 11 and has moved up since then. The fact that it did not continue its fall to deeper post-Sept. 11 lows gives chart-watchers increased confidence.

"A cyclical recovery typically starts with an inventory rebound," says Pacific Growth Equities' Jim Liang. "That can drive significant growth for comm-IC guys because the inventory correction has been so severe." Liang believes recent positive economic data has swayed investors who were concerned about the carriers that buy communications equipment. He says the communications market will still be challenging for the next few quarters, but he thinks the data-communications business will pick up soon.

Wall Street currently expects some of the communications component makers to restart growth after a punishing 2001. According to Multex.com, analyst consensus estimates 4% sequential growth in sales from Broadcom this quarter, 5% gains from Vitesse and a 15% jump at Lattice, though Applied Microcircuits and Anadigics are projected to see revenues fall 24% and 17% during the quarter.

That's nothing to do backflips about, but after several quarters of looking for a bottom investors are increasingly convinced that the upswing is beginning at last.