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Analysts: Chipmakers To Beat Quarterly Expectations

According to some on Wall Street, the recently ended quarter will prove to be a good one for Orange County’s chipmakers.

The worst of the chip downturn that plagued the industry has passed and many expect chipmakers to outpace their own modest expectations for the third quarter and revise their outlooks upward for the current one.

“I expect very nearly every semiconductor company to come at the high-end or above the high-end of their guidance,” said Patrick Wang, an analyst at Wedbush Morgan Securities Inc. in New York.

Earnings season kicks off this week with bellwether chipmaker Intel Corp. set to report results on Tuesday. Intel is considered an early indicator of how other chipmakers are likely to perform.

There are a few things that have helped make for a better than expected quarter among chipmakers.

For one, chip stockpiles were kept at low levels, keeping prices steady.

“One of the biggest reasons for the good quarter is that we’ve seen a relatively lean inventory situation out there,” Wang said.

Industry watchers look at inventory levels as indicators of demand for chips, which go into consumer electronics, computers and cell phones, among other devices. When there’s a glut of chips, it means ordering could be down.

“Following our most recent checks, we believe semiconductor order trends remain strong and channel inventories (are) lean,” Rick Schafer, an analyst at Oppenheimer & Co. in New York, said in a research note.

There was also a pickup in chip ordering ahead of Microsoft Corp.’s launch of Windows 7 later this month. Computer makers have been ramping up their own production as they anticipate a boost in sales of PCs loaded with the latest Windows software.

“You saw some PC builds getting pulled in for the months of August and September,” Wang said.

Global chip sales still are down from a year ago, but they seem to be rebounding a bit on a monthly basis.

Worldwide chip sales totaled $19 billion in August, down 16% from the same period a year earlier, according to data from the Semiconductor Industry Association, a San Jose-based trade group. In July, global chip sales dropped 18% from the same month a year earlier.

The year-over-year decline in August was actually the smallest seen yet this year, the report showed. For the first six months of this year, monthly chip sales fell by an average of 26% from 2008.

August sales were also up 5% from July sales figures, indicating a bit of a recovery to many industry watchers.

“We remain cautiously optimistic on semi(conductor)s and believe we remain within the confines of a healthy cyclical recovery,” analyst Wang said in a research note.

The biggest laggard is corporate demand, which still hasn’t recovered from its drop-off last year.

“Notwithstanding the slow recovery of demand from the enterprise sector, we are encouraged that industry momentum has turned positive following the steepest downturn in more than a decade,” George Scalise, president of the Semiconductor Industry Association, said in a report.

Local chip companies largely are expected to turn out solid results.

Analysts have high hopes for Newport Beach chipmaker Conexant Systems Inc., which makes chips that go into digital photo frames, networked audio gear and other devices.

Analyst Dan Morris at Oppenheimer & Co. expects Conexant to “meet or beat” its outlook of $500,000 in profits on sales of $54 million for the third quarter.

He began covering the company last week with an “outperform” rating and a price target of $5 per share.

The company recently was trading at around $3 per share on a market value of $150 million.

It helps that Conexant has been aggressively working down its debt.

The company finished paying off some $80 million in September.

“From a fundamental perspective, we believe the company is well positioned in its core markets to drive significant earnings growth,” Morris said.

Irvine’s Microsemi Corp., a maker of chips for military, aerospace and industrial uses, is getting back to its typical “beat and raise” pattern of results, where its better-than-predicted results raise its current

outlook, according to Craig Berger, analyst at FBR Capital Markets Corp. in New York.

“Microsemi is working its way back into the good graces of the investment community through sound execution and quick earnings recovery,” he said. “We believe Microsemi’s gross margins will track better than expected over the next two to three quarters, possibly reaching 50% in mid-2010.”

Berger recently added Microsemi to his list of top picks with an “outperform” rating and a $22 per share price target. The stock recently was trading at about $16 per share on a market value of about $1.3 billion.

Irvine’s Broadcom Corp., which makes chips for networking gear, computers and consumer electronics, is expected to report profits of $164 million on sales of $1.2 billion.

Broadcom is set to report results next week.

Newport Beach’s Mindspeed Technologies Inc., a maker of chips for wireless networks, “appears well positioned for continued growth,” Oppenheimer’s Morris said.

“Mindspeed is on track to meet or beat Street estimates,” he said.

Analysts are looking for a loss of $472,000 on sales of $35 million.

Positive earnings revisions are expected by some analysts on the heels of third-quarter results.

“We are going to see numbers go up across the board and see lots of positive estimate revisions,” analyst Wang said. “That will be a nice tailwind for those stocks and it will add fuel to the fire.”

The Philadelphia Semiconductor Index, which tracks 18 chip stocks, is up about 44% since the start of the year.

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