During the past 7 days, investors received 3 signs that the outlook for the semiconductor industry is improving.

First, last Wednesday, Gartner Inc. raised its forecast for worldwide semiconductor sales. The consulting firm now expects a 17.1% decline, a huge improvement from its previous forecast for a 22.4% drop. Gartner credited lower prices on LCD TVs and computers as well as China’s stimulus package for helping the industry.

Second, Intel (INTC) raised its third-quarter guidance. The chipmaker now anticipates third-quarter revenues at about $9 billion, versus its previous forecast of $8.5 billion. Gross margins are expected to be around 53%, with the projection likely being too conservative, rather than too pessimistic.

Since Friday’s announcement, 22 out of 35 covering brokerage analysts have raised their 2009 profit projections for INTC. The new Zacks Consensus Estimate of 62 cents per share is 6 cents higher than the average forecast of a week ago. Notably, 18 analysts also raised their 2010 profit projections. These revisions pushed the consensus estimate 8 cents higher to
$1.17 per share.

Third, the Semiconductor Industry Association (SIA) announced on Monday that July worldwide chip sales rose 5.3%. This was the 5th consecutive monthly increase. Sales of netbook computers and mobile phones helped to drive the increase, though corporate spending remained lackluster.

Texas Instruments to Be Next?

The industry could get an additional piece of good news when Texas Instruments (TXN) gives its mid-quarter update on Sep 9. Two analysts raised their third-quarter profit projections within the past 7 days, pushing the Zacks Consensus Estimate a penny higher to 34 cents per share. Plus, TXN topped second-quarter forecasts after raising guidance during its last mid-quarter update in June.

Analysts Raising Forecasts on Other Chip Companies Too

Brokerage analysts have not confined their bullishness to just INTC or TXN. During the past 2 weeks, multiple analysts have raised their full-year profit projections on Analog Devices (ADI), Marvel Technology (MRVL), Omnivision (OVTI), Semtech (SMTC) and International Rectifier (IRF).

ADI’s CEO, Jerald Fishman, recently said “there are near-term indications that business conditions are improving.” MRVL and OVTI beat fiscal second-quarter expectations last week.

The Chip Recovery Continues

All of this confirms what I have been saying in this column since last March: the semiconductor industry is in the early stages of recovery. The length and magnitude of this recovery may be determined next year with corporate spending. Many PCs and servers are at or near replacement age.
Should the economy continue to improve, tech spending will likely increase, even in a slow growth scenario. This would be a big positive for the chip companies, who have cut costs and inventory levels.

Zacks Rank

IRF is a Zacks #1 Rank (“strong buy”) stock. MRVL, OVTI, SMTC and TXN are Zacks #2 Rank (“buy”) stocks. ADI and INTC are Zacks #3 Rank (“hold”) stocks. All of them are classified in Electronics-Semiconductors.

Sector Rank as of Sep 2
Sector This Week’s
Zacks Rank
Last Week’s
Zacks Rank
Revisions Ratio
FY09 Estimates
Revised Up
FY09 Estimates
Revised Down
Consumer Staples 2.63 2.63 2.68 308 115
Conglomerates 2.65 2.69 4.50 27 6
Retail-Wholesale 2.74 2.74 2.04 725 356
Auto-Tires-Trucks 2.84 2.82 1.34 67 50
Computer and Technology 2.92 2.92 1.71 958 559
Consumer Discretionary 2.96 2.94 1.38 346 250
Medical 2.97 2.96 1.31 746 570
Business Services 2.99 2.95 1.23 142 115
Basic Materials 3.00 3.07 0.94 210 224
Utilities 3.02 3.02 1.01 189 188
Oils-Energy 3.03 3.00 1.26 686 545
Industrial Products 3.04 3.05 0.85 165 194
Construction 3.06 2.99 1.17 127 109
Finance 3.10 3.12 1.17 815 694
Transportation 3.21 3.20 0.61 113 186
Aerospace 3.23 3.23 1.00 47 47

Charles Rotblut, CFA, is the senior market analyst for Zacks.com. He can be reached at crotblut@zacks.com.

Zacks Investment Research