Chip Cheer Seen Closer

In the cyclical world of semiconductors, bad times portend good times.

So amid the bleak streak of earnings reports that rained down on the Street for the past month, some investors are cautiously preparing for better days.

It was hard to find much to cheer about in the fourth-quarter financial results. Sales were generally weak, with many companies having pared back their projections midway through the quarter -- and guidance for the current quarter looks even worse.

According to Wedbush Morgan analyst Craig Berger however, there are already signs that the first quarter may be the bottom of the industry's latest downturn.

Berger points to On Semiconductor(ONNN) and Microsemi(MSCC), both of which served up worse-than-expected guidance for the first quarter. Management at both companies however also called the first quarter the cyclical bottom, projecting that business would pick up in the subsequent quarters.

That these comments are coming from chipmakers like On Semi and Microsemi is important, says Berger, since their customer base and vast catalog of chips mean they have a broad exposure to various end markets. Wedbush Morgan makes a market in shares of On Semi and Microsemi.

"We are clearly in the seventh or eighth inning of this global supply-chain inventory workdown," says Berger.

Citigroup analyst Glen Yeung sees another sign that chip inventories are being worked down. According to Yeung, chip unit growth in the fourth quarter was below unit growth for PCs and cell phone handsets -- a discrepancy that suggests the industry's chip glut is being drained, as electronic goods being sold are using chips from their own warehouses.