Raymond James slashes chip stock profit estimates, says it is ‘too early’ to call bottom on tanking sector

Aaron M. Sprecher | Bloomberg | Getty Images

An Intel Corp. 32nm Westmere chip sits on display during the Microsoft Global Energy Forum in Houston, Texas.

There is more pain ahead for semiconductor stocks, according to Raymond James.

The firm reduced its 2019 earnings estimates for eight chip stocks, predicting companies will announce weakness in business activity.

On Sept. 25, Caso downgraded several semiconductor stocks, saying the sector has entered a “cyclical downturn” after spending a week in Asia talking to chip supply chain companies.

“Since we downgraded the group … stock prices have fallen sharply, the volume of negativity from the rest of the Street has increased markedly, and we believe most investors now expect some degree of estimate cuts,” analyst Chris Caso said in a note to clients Monday. We are “cutting estimates across much of the space. … Net, we think it’s too early to call a bottom, despite what’s now widespread bearish sentiment among investors.”

The iShares PHLX Semiconductor ETF has declined nearly 6 percent since Sept. 24 through Friday versus a modest 1 percent fall for the S&P 500.

Caso cut his Intel 2019 earnings per share forecast to $4.02 from $4.24. He also reduced his 2019 earnings estimates for several other chip stocks – including Analog Devices, Maxim Integrated and Texas Instruments.

The analyst believes chip stocks will continue to fall until more semiconductor companies admit to deteriorating business trends. He told his clients to look for positive stock price action on negative announcements as a signal a “bottom” is near.

“In order for semis to bottom, we need to hear bad news from the companies themselves,” he said. “We do however expect this to occur quickly, and wouldn’t be surprised to be buying semis again in the November – March time frame. The best indicator that weakness is dialed into stocks is when stocks stop going down on bad news.”