Chips: ThinkEquity’s Disaster Scenario Charts Potential Sell-Off

ThinkEquity‘s semiconductor analyst Krishna Shankar today offers a “theoretical framework” for downside in chip stocks, in which he sees some stocks having greater potential downside than others, based on the way their shares traded during the recession.

Shankar sees Broadcom (BRCM), Cavium (CAVM), Hittite Microwave (HITT), and SanDisk (SNDK) having 25% to 50% downside, with Spansion (CODE), Micron Technology (MU), and Texas Instruments (TXN) having “less than 15% downside.” He also writes that Entropic (ENTR), Pericom Semiconductor (PSEM), Ultra Clean Holdings (UCTT), and The LGL Group (LGL) are oversold at this point.

Shankar’s framework models a semi industry revenue decline of 10% in 2012, a 20% drop in Ebitda, and a 25% decline in earnings per share. He used a 10 times P/E multiple as the hypothetical “trough” valuation for the stocks, though some high-growth names might not go that low, he writes.

Although some bulls might say names such as Broadcom wouldn’t be easily parted with by investors, he thinks that in such a scenario, even the baby may be thrown out with the bathwater:

We note that bullish proponents of what we perceive as high-quality growth names such as BRCM, CAVM, HITT, SNDK may argue that their revenues and margins would decline to a much smaller extent than our assumed industry decline of 10% and their margins and earnings may hold up better. But, as we observed during 2008/2009, we may experience multiple compression across the board should investors also sell the liquid, high-quality names to raise cash during a bear market. In such as scenario, in our opinion, the “high-flying” stocks with rich multiples may have more downside risk.

Despite the risk, however, Shankar actually has bullish ratings on several of these names. He rates Broadcom a Buy, with a $40 price target, and SanDisk is a Buy as well, with a $58 price target. Micron is a Buy in his book, with a $10 price target, while TI shares are rated Hold.

Update: On a related note, JMP Securities’s Alex Gauna today cut his estimate for Intel (INTC) for Q3 and for Q4, though he reiterated a Market Outperform rating on the stock, and $27.50 price target, writing that the shares should be bought “owing to its [Intel's] attractive valuation levels and advantageous positioning for technology trends.”

Gauna’s revision to his estimates is “relatively immaterial in the grand scheme of things,” and is meant mainly to reflect broad-based macroeconomic weakness. He cut his Q3 estimate to 62 cents a share in profit from a prior 64 cents, and cut his Q4 view to 66 cents from 64 cents. His estimate for 2012 goes to $2.50 per share from $2.55. That’s still above Street consensus of $2.44, however, he notes.