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Fairchild Semiconductor — How to Play Thursday’s Earnings Report

Shaky demand for chips merits investor caution

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Since the reduction in guidance from the company, shares of Fairchild have traded flat. Previously, shares were lower over the last three months, with the stock down nearly 30%, although the stock is higher during the past 12 months.

It is disconcerting to see the company affirm guidance and then, within two months, reduce guidance. Clearly the demand picture is changing dramatically. While Wall Street anticipated the weakness with lowered earnings estimates, the question for traders is, have the cuts to profit expectations gone far enough?

As noted, shares are trading lower over the last quarter lowering the valuation to reflect current uncertainty. Profits are expected to be lower in 2012 compared to 2011. Should things deteriorate further, the stock could drop hard. The company is supported at this point by the strong mobile phone market.

Fairchild traded below $4 per share when the stock bottomed in early 2009. I would be cautious with this one. It is a tricky proposition to predict profits when market demand appears to be deteriorating. That uncertainty could lead to wild swings in either direction.

Since the company reduced estimates in early September, it is likely that they will meet reduced Wall Street expectations. Then again it is entirely possible that they miss. This is not a stock to trade before the news is released. I would take a wait-and-see approach.

As of this writing, Jamie Dlugosch did not own a position in any of the aforementioned stocks.

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