Goldman raises its microchip ratings

Goldman, Sachs & Co gave its top stock rating to semiconductor maker Intel Corp, whose shares have fallen by more than half in a year, and several other chipmakers, saying that business may improve in the fourth quarter.

Terry Ragsdale, a Goldman analyst, boosted Intel to "recommend list" from "market outperform." Ragsdale said chip customers are using up surplus inventories, and he cited Goldman's belief that second-half US economic growth will speed up, after bottoming at 0.7 percent last quarter, leading a recovery overseas.

"The chip industry, like all cyclical industries, live and die on their inventory positions worldwide, and that's been the key here," Jerry Castellini, president of investment firm CastleArk Management LLC, said on Bloomberg Television.

Goldman joins Salomon Smith Barney and Merrill Lynch & Co among the optimists that expect sales and profit to recover soon as clients use up surpluses built on overestimated demand. Analysts have divided into opposing camps about the prospects for chips, with Lehman Brothers Inc and Credit Suisse First Boston less hopeful as chipmakers struggle with one of their worst slumps.

Ragsdale also increased his ratings on Analog Devices Inc. and Maxim Integrated Products Inc to "recommend list" from "market outperform." He raised Linear Technology Corp to "market outperform" from "market perform." Ragsdale issued his previous ratings in March after joining Goldman in February from JP Morgan Chase & Co.

On Monday, Intel shares rose US$0.61 to US$30.56. Maxim rose US$3 to US$51.19, and Analog Devices rose US$1.54 to US$48.99. Linear rose US$1.51 to US$45.83.

The Philadelphia Semiconductor Index rose 10.33 points to 603.38 on Monday. The index has fallen 41 percent in the past year and has gained 4.6 percent in 2001.

Intel, the biggest chipmaker, and other semiconductor companies such as STMicroelectronics NV and Altera Corp have reported falling sales and profit this year. Intel said July 17 that second-quarter profit sank 94 percent on a 24 percent sales drop.

Business is starting to show signs of improvement, Ragsdale said. Some chipmakers are getting more orders, rather than just experiencing fewer cancellations, and more good news should come by year's end, he wrote.

"We think the stocks are headed up for now," Ragsdale wrote in a research note. "The recovery writing is on the wall, and we don't see how investors will be able to resist."

Customers are making progress working through excess chip inventories, and semiconductor makers could see two or three quarters of rising sales when stockpiles are gone, even if demand doesn't fully recover, he said. Ragsdale expects demand for PCs and cell phones to rebound first.

By contrast, Lehman Brothers analyst Dan Niles recently said to avoid Intel shares. Salomon Smith Barney analyst Jonathan Joseph has said chip orders are improving, and Credit Suisse First Boston analyst Charlie Glavin recommends waiting before investing in the industry. Merrill Lynch has raised its recommendations, saying that the worst is over.

While much of the talk so far has centered on PC demand, Goldman is also more optimistic about the outlook for other types of chips. Nathaniel Cohn, the firm's communications-chip analyst, upgraded Broadcom Corp, Qualcomm Inc, Conexant Systems Inc and Microtune Inc to "recommend list" from ``market outperform.'' Business is becoming more stable, Cohn said, especially in chips for wireless and cable gear. Those customers also are reducing inventories, and he expects new products to help sustain the momentum.