Communication Chip Producers To Suffer From Weak Motorola Handset Sales

Yesterday’s Wall Street Journal (sub. req.) noted that chipmaker Linear Technology (LLTC) acts as an early indicator of industry trends:

According to Lehman Brothers semi analyst Romit Shah, Linear is likely to follow peers National Semiconductor (NSM) and Maxim Integrated Products (MXIM) which warned last month about weakening demand for analog chips. Shah believes that Linear is a good indicator of the general state of the economy, as they are known for answering customer demand more quickly than their peers. A decline in sales, therefore, would more accurately reflect a real-time decline in market demand.

Romit was right. Linear Chief Executive Lothar Maier said the business environment was weaker than the company had expected, and bookings fell slightly. Furthermore, Linear provided another example of the inventory glut we have been warning about for months. Although Linear’s sales fell slightly from the previous quarter, inventories rose nearly 8% in the same period.

Since Linear’s major product lines include desktop computers and mobile phones, the outlook also strengthens our concerns for the overall semiconductor sector, which has seen a disproportionate share of its recent strength from the wireless handset market. That concern is not lessened by Motorola’s (MOT) sales shortfall, which prompted Albert Lin, analyst at American Technology Research to say, “I think the fact the company was light on sales and has 85 percent of its revenue concentrated on cell phones will plague the stock for at least the next several quarters.”

Fasten your seat belts.

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Comments

[GS MKTS]

Hello, very fair - LLTC getting hurt bad today and the SMH is down. Although, it is worth noting that the SMH actually opened up today and when the oil inventories number came out, it reversed and has not looked up since then.
Given that LLTC is an early indicator and the volatility of the eps season, which names specifically do you think have most room to the downside? ISIL reports today and should be interesting as well like LLTC. Thank you.

[WilliamTrent]

I would guess that, like today, the semi equipment companies and wireless foodchain are the weakest links. Either the big boys in those groups (TXN, AMAT) or names that have run up and have high valuations.

[GS MKTS]

William - nice call on TXN; I was surprised at last night's action with the strength. I just read your article referencing this comment thread as well.

[WilliamTrent]

Thanks GS. I keep plugging away, and hopefully get more right than wrong. I'm still surprised by how resilient the semis have been overall. The supply imbalance is still getting worse, but the underlying causes are dissipating so it's possible the summer lows marked the bottom rather than it still being ahead.

[GS MKTS]

The semi resiliency has indeed been frustrating, but I am cautious on the SMH itself now - check out the weekly chart with a negative formation now. Also today's GS call on weaker MB data is helping. There is a definite bid to the names.
I posted on your INTU comment - that is a v interesting note.

[WilliamTrent]

I think the Freescale buyout is indeed keeping a floor on the semis, rightly or wrongly.