Barclays' Pair Trade In Semis: Upgrade Intel, Downgrade Cypress

Most U.S. semiconductor companies are likely to report strong Q3 results, Barclays' Blayne Curtis said in a report. He mentioned that data from the PC OEM/IDM channel had continued to reflect growth through September, while expressing concern over the handset and auto supply chains.

Intel

Blayne upgraded the rating on Intel Corporation INTC from Equal-weight to Overweight, while raising the price target from $38 to $45. Although Intel is benefiting from the improving PC market, the share of this business is gradually declining and the non-PC businesses are contributing a majority of the company’s overall revenue.

“We believe Intel can transition from a no-growth story to one of accelerating growth and in turn will garner a better valuation for such a dominant franchise. Data Center Group (DCG – Servers) is now roughly 1/3 of total revenue and with the PC market normalizing to low single-digit declines, the total company would grow at 5%+ (from ~4% organically this year),” Blayne wrote.

The analyst expects Intel to report its Q3 revenue in-line to slightly better than its updated guidance of $15.6 billion, which the company had raised from $14.9 billion. With the PC supply chain trends continuing to track better, Intel would likely announce its Q4 revenue guidance marginally higher than the current consensus projection of $15.8 billion.

Cypress

Blayne downgraded the rating on Cypress Semiconductor Corporation CY from Overweight to Equal-weight, while maintaining the price target at $11.

“We continue to like CY’s long term potential, ~4% div yield, and increasing focus on the Automotive and Industrial end markets, but at this point it is clear the story is taking longer to play out than originally hoped (particularly on the GM front),” the analyst commented.

M&A speculations have driven Cypress’ shares higher, but the company’s underlying fundamentals have not improved significantly. Blayne awaits signs of a marked upturn in revenue growth or GM expansion to turn more positive on the stock.

The analyst expects Cypress to report its Q3 revenue in-line with the consensus of $526 million and announce its Q4 revenue guidance roughly in-line with the current consensus estimate of $516 million.

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