Fundamentals In Semi Sector 'Shaky' Following Q3 Results
- Semiconductor stocks have broadly risen quarter-to-date, outperforming the S&P.
- Deutsche Bank’s Ross Seymore has a Neutral rating on the Semi sector.
- Despite negative estimate revisions, semiconductor stocks have surged, taking valuations to a level that is not supported by fundamentals, Seymore commented.
Despite largely negative estimate revisions, the SOX jumped 9 percent QTD, outperforming the S&P. Semiconductor stocks were boosted by a sharp rise in the broader market, reacceleration of M&A, and “investors’ willingness to call a cyclical “bottom” in the semi sector,” analyst Ross Seymore said.
While semiconductor companies mostly reported in-line results, soft guidance was soft due to continued sluggishness in the macro environment and China-led inventory drawdowns, Seymore mentioned. PC players exhibited “solid prints on end-market stability.”
Companies that beat 3Q EPS expectations did so due to cost-control measures. Seymore added, however, that their guidance was disappointing due to low end-demand and high channel inventories.
Revenue and EPS estimates for the top 50 semiconductor companies fell by 2-6 percent QTD, while YTD the revisions have declined 7-10 percent.
While semiconductor stocks have climbed, industry fundamentals continue to be tepid and inventories are at or above average. The current valuations “leave us cautious on the sector as a whole and stressing stock-picking selectivity,” Seymore mentioned.
The analyst added that he continues to favor companies “with specific growth drivers or compelling cost-cutting/self-help programs,” citing Intel Corporation (NASDAQ: INTC) in mega cap, NXP Semiconductors NV (NASDAQ: NXPI) and Maxim Integrated Products Inc. (NASDAQ: MXIM) in large cap, and ON Semiconductor Corp (NASDAQ: ON) and MaxLinear, Inc. (NYSE: MXL) in small cap. All these stocks are rated Buy.
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