Wall Street is keeping a close eye on a quarterly balancing act for chipmakers: inventory.
Stockpiles of unsold chips provide a glimpse into the health of the sector. At this stage in the recovery, some are expecting chipmakers to report rises in inventories as they report results for the recently ended quarter.
Irvine-based Microsemi Corp. is set to kick off earnings season for local chipmakers this week, followed next week by Broadcom Corp. of Irvine and Newport Beach’s Conexant Systems Inc.
The rising inventory trend is likely to spill over into the rest of the year, according to analysts.
Usually, growing inventory spooks Wall Street with fears of pending oversupply and falling prices—and lower profits.
That’s a perennial factor for the sector. But some bullish analysts aren’t fazed by it at this stage in the economic recovery.
“While these increases are likely to create some investor concern, we continue to believe such inventory growth is simply a return to normalcy and necessary to feed future revenue growth,” said Ross Seymore, an analyst at Deutsche Bank Securities Inc. in San Francisco.
Still, others fear chipmakers could get ahead of themselves.
“Supply chain inventories are clearly building in the first half of 2010, worrying many investors,” said Craig Berger, an analyst at FBR Capital Markets Corp. in New York.
It still isn’t clear how inventory reports will weigh on chip stocks overall, according to Rick Schafer, an analyst at Oppenheimer & Co. in New York
“Despite the improving fundamental outlook, investors appear increasingly skittish and we expect the ‘psychological’ component of semiconductor investing will continue to exert a growing influence on stock prices,” he said.
Overall, analysts’ largely expect what’s called a “beat and raise” quarter from local chipmakers, in which companies beat Wall Street’s estimates for the recently ended quarter and raise their own outlooks for the current one.
Microsemi
Later this week, analysts on average expect Microsemi to report profits of $22 million, up about 37% from a year earlier. Sales are seen coming in at $117 million, up 11%.
“We are increasingly warming to Microsemi,” Schafer said.
Microsemi, which makes chips for military, aerospace and industrial uses, could see a boost from recent deals for chips that go into airport body scanners and some cost cutting, Schafer said.
Earlier this month, Microsemi agreed to buy Phoenix chipmaker White Electronic Designs Corp. for $100 million in cash.
Schafer said he’s looking for a “notable acceleration” in earnings growth from Microsemi in the second half of the year.
Broadcom and Conexant are set to report on April 27.
Analysts are looking for Conexant, which makes chips for digital picture frames, computer speakers and other devices, to start cashing in its chips after months of cleaning up its balance sheet and cutting costs.
The company has reworked its debt and done two stock sales to raise cash.
“We look for investor focus to shift increasingly toward operational executing and performance and away from the balance sheet,” Oppenheimer’s Schafer said.
On average, analysts expect Conexant to see profits of $8 million, up from a loss of $10 million a year earlier. Sales are forecast at $61 million, down 18% from a year earlier after selling off some businesses.
Broadcom, it seems, could be the break-out star of the group. The county’s biggest chipmaker makes chips that go into computers, TV set-top boxes, consumer electronics and cell phones, among other devices.
The company recently was confirmed to have chips in Apple Inc.’s latest toy—the iPad tablet.
“Broadcom’s first-quarter business likely saw continuing strength in combo chips, Wi-Fi, Bluetooth, Ethernet switch and other products, with the (company) likely having tracked toward the high end of its guidance,” Berger said.
Analysts, on average, are expecting Broadcom to post profits of $233 million, more than five times the year-ago figure, on sales of $1.4 billion, which represents a gain of 62% from a year earlier.
