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 INTC in mega cap, NXP Semiconductors NV NXPI and Maxim Integrated Products Inc. MXIM in large cap, and ON Semiconductor Corp ON and MaxLinear, Inc. MXL in small cap. All these stocks are rated Buy.