RBC Takes the Hatchet to Semis (SMH) (INTC) (TXN) (ADI) (NVDA)

September 18, 2012 9:37 AM EDT
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A number of Semiconductor stocks ticked lower pre-market on Tuesday after analysts at RBC Capital downgraded the sector (NYSE: SMH) to Market Weight from Overweight. The sector downgrade comes in response to a number of concerns including inventory, lack of improvements in PC orders, slow growth in communication equipment, and softness in China.

"Order rates are beginning to decelerate across multiple end-markets as macro concerns continue to weigh on the overall mood while a lack of inventory investment could pose near-term revenue risks," said analyst Doug Freedman.

"The current cycle is unique in that semis have contracted three quarters only to exhibit one-quarter of recovery," added Freedman. "That one quarter of growth transpired before bumping into demand levels that could decline."

RBC thinks inventory builds downstream could run below seasonal levels through the remainder of the year.

"Our view is that semiconductor growth rates have compressed to a level such that inventory cycles are not able to drive equity valuation outperformance," said Freedman.

As a result of the revised outlook, Texas Instruments (Nasdaq: TXN), Analong Devices (Nasdaq: ADI), Intel Corp (Nasdaq: INTC), and NVIDIA (Nasdaq: NVDA) were downgraded to Sector Perform from Outperform.

Broadcom Corp. (Nasdaq: BCRM) was upgraded to Outperform due to rising unit content opportunities.

"We believe that at this point in the cycle, it is prudent to rotate into wireless communications names exposed to winning platforms -BRCM, Peregrine (Nasdaq: PSMI) SanDisk Corp (Nasdaq: SNDK)- while reducing exposure to the PC ecosystem - INTC, NVDA, Marvell (Nasdaq: MRVL) - given our reduced unit demand forecasts," concluded Freedman.

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