Fairchild Semiconductor — How to Play Thursday’s Earnings Report

by Jamie Dlugosch | October 12, 2011 6:00 am

Chipmaker Fairchild Semiconductor (NYSE:FCS[1]) reports earnings for the quarter ending Sept. 30 on Thursday before the market opens. Investors are likely to be disappointed as the semiconductor industry looks to be the first sector showing real operating profit declines.

The highly cyclical industry is in a clear down cycle. The silver lining for Fairchild is that it produces chips used in mobile devices. That segment of the market appears to be still in growth mode. On the flip side, Advanced Micro Devices (NYSE:AMD[2]) last week reduced revenue guidance for the third quarter.

That reduced guidance will further entrench bears of the sector, making it difficult for Fairchild regardless of its operating performance.

During the past four quarters, Fairchild has beaten average Wall Street estimates:


When Fairchild reported results for the quarter ended June 30, it included guidance for the third quarter that was in line with Wall Street expectations. Despite that affirmation, Wall Street analysts slashed expectations for the period ending Sept. 30. Ninety days ago, the expectation was for the company to make 42 cents per share. Today, that estimate is 32 cents per share.

In early September, Fairchild announced sales in the quarter would be weaker than previous guidance. That news confirmed what analysts had expected. For the full year, Wall Street is now looking for the company to make $1.41 per share. In the following year, profits are now expected to slip to $1.32. At current prices, Fairchild trades for 8.5 times current-year estimated earnings.

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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.

  1. FCS: http://studio-5.financialcontent.com/investplace/quote?Symbol=FCS
  2. AMD: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMD
  3. [Image]: https://investorplace.com/wp-content/uploads/2011/10/Fairchild-earnings.jpg

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