TI Results Shows Chip Inventories, Not Demand, Are Improving

Texas Instruments Inc. (TXN) offered hope for the continued recovery of the semiconductor sector with its earnings report late Monday, but don't confuse better inventories with a return of demand for technology products.

TI made clear that the huge drop in chip purchases seen earlier in the year are over, as the supply chain for tech products begins a return to normal. That's good news for fellow analog chip makers as they report earnings results for the quarter, but there's little evidence yet that real growth - based on an improving market for cellphones, computers and other tech products, instead of inventory corrections - is on the horizon.

With the Philadelphia Semiconductor Index, or SOX, up more than 40% over the past six months, that could leave chip stocks in limbo while investors wait for a broader economic recovery.

"There's no reason why you should feel comfortable about things right now," said Wedbush Morgan analyst Patrick Wang. While short-term traders probably have a few months left of safety, Wang said, the key data on prospects for the traditionally stronger second half of the year won't be out until late August or September.

"If you see those things coming back negatively, watch out," he said.

Still, TI's second-quarter results and third-quarter outlook bode well for other chip makers, particularly analog chip makers including Analog Devices Inc. (ADI) or National Semiconductor Corp. (NSM).

TI, which makes chips used in everything from cellphones to industrial machinery, topped Wall Street estimates for earnings and revenue, and offered a view of the third quarter that suggests improvement in the market will continue.

Analog chips, which perform tasks like managing battery power or working in communications infrastructure, saw the biggest increase in sales from the previous quarter. Revenue in the segment grew 21% from the first quarter, though it was down 24% from a year ago.

But during the conference call to discuss the results, Chief Financial Officer Kevin March said growth from the previous quarter is tied to the actions of TI's customers more than a change in end demand.

Customers had been slashing the number of chips they buy as consumers stopped buying tech products, and the rate at which they are reducing those chip inventories is slowing. That allowed TI's shipments continued to rise, putting demand for chips closer in line with demand for the products they help run.

Correcting this disparity is an important step in the chip sector's recovery, but some worry chip stocks are anticipating a broader economic recovery as well. With unemployment continuing to rise and credit still scarce for consumers, it's unclear whether chip makers will be able to grow after the supply chain gets back in line.

JPMorgan analyst Chris Danely said he is concerned about the 25% sales growth TI could see over two quarters, based on its report, compared to end markets that were roughly flat.

If TI will be shipping its chips at around the same levels customers are using them by the end of the third-quarter, as some assert, its prospects will again be tied to tech product sales. Spending on those areas in the crucial fourth-quarter is still anyone's guess.

-By Jerry A. DiColo, Dow Jones Newswires; 212-416-2155; [e-mail]