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Earnings Outlook: Texas Instruments emerging as favorite after early chip earnings reports evoke sighs of relief

Early chip-industry earnings reports have elicited a sigh of relief in a sector where many companies have slashed forecasts — but there are more big tests in the days ahead.

Texas Instruments Inc.
TXN,
+1.17%

is scheduled to report third-quarter earnings after the close of markets on Tuesday and represents a first look at a chip maker immersed in the automotive and industrial sectors — one of the few that has yet to see a huge drop-off in demand as semiconductors swung from a shortage to a glut in 2022.

On Monday, Barclays analyst Blayne Curtis upgraded his rating of Texas Instruments to equal-weight from underweight — while downgrading a slew of other analog-chip stocks — on the basis that the Dallas-based chip maker should be a main beneficiary of the $52 billion in funding from the U.S. CHIPS Act and should see less of an earnings correction compared with peers.

Curtis also downgraded both NXP Semiconductors NV
NXPI,
+0.14%

and Analog Devices Inc.
ADI,
-1.20%

to equal-weight from overweight as demand eases for chips serving the auto- and industrial-manufacturing sectors, the hardest-hit sectors during the two-year supply shortage that was triggered by the pandemic.

NXP is scheduled to report Oct. 31, and Analog Devices is scheduled to report Nov. 22.

Shares of Texas Instruments were last up 0.5% in Monday afternoon trading, while U.S. shares of NXP fell 0.9% and Analog Devices shares dropped 1.8%, compared with a 0.2% rise in the PHLX Semiconductor Index
SOX,
+0.84%

and a 0.8% rise on the S&P 500 index
SPX,
+1.44%
.

In a recent note, B of A Securities analyst Vivek Arya said that Texas Instruments’ report is crucial, as its outlook could “stir” the auto and industrial chip makers like NXP, Analog Devices and Microchip Technology Inc. 
MCHP,
+1.16%

“This subsector could get rattled next week when leader Texas Instruments reports, and per its historical practice modestly beats Q3, but then potentially issues a conservative Q4 outlook (sales likely guided down 6-10% vs cons. -4% QoQ, given higher consumer exposure), confirming cycle concerns,” Arya said.

“If conversely, Texas Instruments’ guidance is strong, it could surface concerns about an inventory build mainly because the current macro concerns trump individual company views, especially for highly cyclical diversified chip makers with limited visibility,” Arya said. 

Analysts surveyed by FactSet estimate earnings of $2.39 per share on revenue of $5.14 billion, based on Texas Instruments’ forecast of $2.23 to $2.51 per share on revenue of $4.9 billion to $5.3 billion. For the fourth quarter, analysts expect earnings of $2.23 on revenue of $4.94 billion.

Read: Chip stocks could suffer worst year ever as effects of shortage-turned-glut spread

Texas Instruments ranks as one of the best-performing chip stocks to date with its loss of 15%, compared with a 41% drop in the PHLX Semiconductor Index
SOX,
+0.84%

and a 21% decline in the S&P 500 index
SPX,
+1.44%
.

Meanwhile, shares of chip-making-equipment manufacturer KLA Corp.
KLAC,
+2.07%
,
which is scheduled to report after the close of markets Wednesday, are down 31%.

KLA is under a bit of pressure to produce not just strong results but a strong outlook as well, following last week’s reports from Lam Research Corp. 
LRCX,
+1.53%

and Netherlands-based ASML Holding NV
ASML,
+2.79%

that showed both companies exhibiting strength while noting the many challenges that face the industry.

All three companies serve the semiconductor fabrication market, including companies like Taiwan Semiconductor Manufacturing Co.
TSM,
-3.81%

that make the silicon wafers used by Nvidia Corp.
NVDA,
+1.67%
,
Advanced Micro Devices Inc.
AMD,
+0.09%
,
Apple Inc.
AAPL,
+1.85%

and others to make chips.

Recently, Tawian Semiconductor said it would trim its capital expenditure budget for 2022 by about $5 billion following a string of quarterly hikes. Separately, U.S. shares of the company dropped as much as 6% Monday following a Financial Times report that the third-party fabrication facility, or fab, thinks U.S. efforts to wean off foreign fabs are “doomed to failure.”

Read: Taiwan Semi slumps after reported diss of U.S. chip efforts, analog-chip downgrades also drag on semiconductor sector

B of A Securities’ Arya, who counts KLA as his favorite in the space, expects impacts from the company, but not as bad as Lam Research, which estimated a hit of up to $2.5 billion in 2023 from China restrictions, or about 15% of its last reported full year of revenue.

“We expect peer KLA to also be impacted, though by a lower 3-5% or $80-$130 [million] quarterly level,” Arya said. “On the other hand, we estimate peer Lam’s exposure is likely greatest, closer to 7-8% of sales or $350-$400 [million]/quarter given its higher memory exposure. Near-term, Lam’s deferred revenue balance could help offset the China impact.”

Analysts expect fiscal first-quarter earnings of $6.22 on revenue of $2.6 billion, based on KLA’s forecast $5.70 to $6.80 a share on revenue of $2.6 billion. For the current fiscal second quarter, analysts forecast earnings of $6.14 a share on revenue of $2.58 billion.

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