In a report circulated Friday (February 10), Danely wrote that many semiconductor companies and distributors, including Texas Instruments Inc., Microchip Technology Inc., Xilinx Inc., and Arrow Electronics Inc., have stated that their bookings have increased since mid-December. Data from the Semiconductor Industry Association also indicated that chip sales increased more than the seasonal average in December compared with November, Danely said.
Danely said the Philadelphia Stock Exchange's SOX semiconductor index has appreciated 27 percent since he called a bottom to the industry downturn in mid-September, well above the 16 percent gain posted by the S&P 500 in that timeframe. "Despite the move in the SOX, we believe the majority of upside to consensus estimates is in front of us as semiconductors are still under-shipping demand by at least 10 percent," Danely wrote.
Danley said the semiconductor market has now entered "phase III" of the industry upturn, with chip companies report improving order rates due to inventory replenishment. "We expect most companies to reiterate that order rates are improving throughout the quarter," Danely said.
In "phase IV" of the upturn, which Danely expects to begin in March or April, semiconductor companies will begin raising sales and earnings targets due to continued improvement in orders, Danely said.
While a number of investors have expressed concern that, based on the 27 percent improvement in the SOX since September, an upturn is already priced into current chip stock valuations. "We believe there is still plenty of upside remaining as semiconductors are under-shipping end demand by more than 10 percent,: Danely wrote. "As a result, we expect order rates to continue to improve in [the first half of 2012] due to inventory replenishment as demand now appears stable."
Danley said JP Morgan analysts expect at least two quarters of semiconductor inventory replenishment, even if end demand does not improve. He noted that in 2007 the chip inventory replenishment cycle last two quarters as the SOX