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Tickers in this Article: TXN, INTC, NSM, SLAB
With the recent release of its quarterly earnings and revenue guidance, chipmaker Texas Instruments (NYSE:TXN) added its name to the list of semiconductor companies that have lately been paring back their expectations. Over the last few weeks major players in the semiconductor space like Intel (Nasdaq:INTC), National Semiconductor (NYSE:NSM) and Silicon Labs (Nasdaq:SLAB), have all issued warnings scaling back their expectations for the coming quarters.



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TI Meets Consensus, But Disappoints


While TI's revised forecast for the coming quarter still falls well with its earlier estimates and basically matches consensus expectations of earnings per share of 69 cents on revenues of $3.7 billion, the news has proved insufficient to keep shareholders satisfied as the shares have basically drifted lower since the announcement.



By not raising its guidance, the company is sending a clear signal that its business is softening more than had been anticipated. And since TI is the largest maker of analog chips, which find their way into a broad range of electronics applications, the weakness is directly tied to a broader slowdown in the overall economy. There are growing signs that consumer demand for electronics and computers is slowing down.



Chips Sales to Decelerate Sharply in 2011


It shouldn't come as too big a surprise that chips sales are now experiencing a bit a slowdown. Following a huge slump in 2009, global chip sales staged a dramatic recovery this year, with overall industry sales now projected to grow between 28-30%.



Analysts now concede that the strong rebound in sales included a significant degree of over ordering of by large customers in the PC and networking markets as a precautionary move to hedge against any potential supply shortages in the future. The resulting excess inventory levels will inevitably have to be worked through before chip order re-accelerate. How long this takes will naturally depend on consumer demand for end-products. With industry watcher Gartner Group now forecasting only a 4.6% rise in industry revenues in 2011, it appears that the inventory glut in chips will be around for quite a while.



The Bottom Line


Given the highly cyclical nature of chip demand, a dip in sales following this year's rapid run-up was inevitable. The question now is how long the slump will last. If consumer demand for electronics fails to pick-up materially as we enter the pre-holiday buying season, then there will be little reason to own this sector until sometime in mid-2011. (Balance risk and return to produce adequate income despite inflation. For more information, refer to Build A Dividend Portfolio That Grows With You.)



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