Chips Fall After Bearish Forecast

Salomon Smith Barney Inc. analyst Jonathan Joseph has gotten out in front, saying he has spotted the first signs of a reversal in semiconductor stocks. Some other analysts say he could get run over.

Joseph, if correct, is giving early warning that the good times may be over for a group of stocks that has been among the year’s best performers. The Philadelphia semiconductor index returned 68% this year until Wednesday’s 9.3% slide in the wake of his call.

He downgraded Texas Instruments Inc. (ticker symbol: TXN), Advanced Micro Devices Inc. (AMD), Silicon Storage Technology Inc. (SSTI) and National Semiconductor Corp. (NSM). The slowdown may take six to nine months to unfold, said Joseph, citing evidence of slowing chip shipments and declining prices.

If Joseph is right, he is doing what an analyst is supposed to do, said Marshall Front, chairman of Front Barnett Associates, a money manager in Chicago. “When everyone else is optimistic, he’s supposed to point out what the risks are.”

However, Front said he sees “scant information to lead me to change my view that semiconductor companies are in a very good long-term cycle.” Front owns No. 1 chip maker Intel Corp. (INTC) and said he might add to his holdings if the company’s stock falls further than it did Wednesday.

So far this year, chip makers have been helped by manufacturing capacity constraints that have boosted prices. Intel is up nearly 60%, making it the top performer in the Dow industrial average.

Joseph downgraded Texas Instruments, Advanced Micro Devices and National Semiconductor to “outperform” from “buy,” and cut Silicon Storage to “neutral” from “buy.” He didn’t discuss or downgrade Intel, though his call hurt chip makers across the board.

He said a “slight slowing in cellular phone growth” is a recent cautionary sign for makers of chips used in phones.

Joseph said he is also concerned that capital spending growth will peak this year. A peak in spending on big-ticket items generally correlates with a peak in the semiconductor cycle, he warned.

These arguments did not sway John Spytek, senior technology analyst with Bank One Investment Advisors Corp. in Columbus, Ohio.

Joseph’s comment that a slowdown may not be evident for six to nine months particularly bothered Spytek. “That’s an eternity for these stocks,” he said.

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Taking Chips Off the Table

Semiconductor stocks, which have been among this year’s hottest performers, got clipped Wednesday after a Salomon Smith Barney analyst said the booming sector could be headed for a slowdown. A sampling:

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Ticker Wednesday YTD Company symbol close and change % change Advanced Micro Devices AMD $75.25,-$9.00 +160.0% Micron Technology MU 83.75, -6.50 +114.4 Silicon Storage Tech. SSTI 83.94,-15.06 +103.5 Intel INTC 131.63,-5.25 +59.9 Texas Instruments TXN 65.25, -3.75 +35.1 National Semiconductor NSM 50.25,-7.88 +17.4 KLA-Tencor KLAC 50.06,-8.25 -10.1 S&P; 500 index 1,446.23,-23.09 -1.6

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Source: Bloomberg News