Zacks Industry Rank Analysis Highlights: Bank of America, Fairchild Semiconductor, Intel, Intersil and Wachovia

Business Wire, Oct 26, 2007

CHICAGO -- Zacks.com releases the latest Zacks Industry Rank. Stocks featured in this week's analysis includes Bank of America (NYSE: BAC), Fairchild Semiconductor (NYSE: FCS), Intel (Nasdaq: INTC), Intersil (Nasdaq: ISIL) and Wachovia (NYSE: WB). To see the Zacks Industry Rank and the trend in earnings estimates revisions for more than 200 industry groups, visit http://at.zacks.com/?id=3154.

Zacks Industry Rank Analysis is written by Charles Rotblut, CFA, Senior Market Analyst for Zacks.com.

The weak link in third-quarter earnings, as I predicted, are the semiconductor companies. Inventory levels have been a problem and, as a result, the overwhelming majority of chipmakers are reporting or will report year-over-year comparisons that are not impressive. Nonetheless, there are some semiconductor companies that are giving brokerage analysts reason to be optimistic about next year.

Intersil (Nasdaq: ISIL), which makes chips used in storage devices, DSL drivers and the new iPod Nano, generated adjusted profits of 31 cents per share versus 28 cents per share a year prior. Revenues rose by just 3%, though they sales set a record of $198 million. Gross margins contracted somewhat, reflecting overall industry headwinds. ISIL does expect revenues to increase on a sequential quarterly basis and called for GAAP earnings to total 31 to 32 cents per share in the fourth quarter. The guidance led nine of the 16 covering brokerage analysts raised their full-year forecasts for both 2007 and 2008. EPS growth for 2008 is now forecast to come in at just below 30%.

Brokerage analysts also grew more optimistic about Fairchild Semiconductor (NYSE: FCS) following the company's earnings report. FCS earned 27 cents per share, seven cents above expectations and two cents above year prior profits. Revenues rose 2% to $426.8 million. Gross margins widened thanks to an improved product mix and improved factory loadings. (Factory load is a measure of how close to full capacity a factory is running.) FCS believes continued gains in inventory management and demand from OEM (original equipment manufacturers) should help boost both fourth-quarter revenues and margins. As a result, nearly all of the covering analysts raised their projections for both 2007 and 2008 earnings. EPS growth for 2008 is now forecast to be near 50%.

It is important to realize that the estimate revisions partially reflect these companies ability to jump over a relatively low hurdle. The median semiconductor in the S&P 1500 Composite was projected to post flat earnings growth this quarter. In other words, there was room for positive surprises. This is not to downplay the upward revisions that have occurred for FCS and ISIL, but rather to simply put them in perspective.

One chipmaker that was expected to post strong growth, however, was Intel (Nasdaq: INTC) and the semiconductor giant didn't disappoint. The company pleased its shareholders with profits of 32 cents per share on an adjusted basis, an improvement of 50% over year prior levels and a penny above expectations. Revenues rose 15% as, well, the company sold more semiconductors. Gross margins also widened, reflecting more pricing power and market share gains. The company also provided fourth-quarter guidance that pleased the street: revenues of $10.5 to $11.1 billion and gross margins around 57%.

Shares of INTC closed at a new 52-week high following the earnings announcement, but Friday's market turmoil took the chipmaker back down. Those of you who thought the reaction to the third-quarter earnings was temporary, however, may want to reconsider your opinion. The reason is that 19 brokerage analysts have raised their 2008 forecasts within the past seven days. The cumulative impact of these revisions has been a six-cent increase in the consensus earnings estimate to $1.46 per share. If achieved, this would represent a 23% growth rate for next year.

INTC is a Zacks #1 Rank ("strong buy") stock. FCS and ISIL are Zacks #2 Rank ("buy") stocks.

More than 10% of all downward earnings estimate revisions made over the four weeks were for companies classified in Banks-Major Regional, Banks-Midwest, Banks-Southeast and Banks-West. These four industry groups contain approximately 10% of all Zacks #5 Rank ("strong sell") stocks.

Last week, multiple banking firms missed lowered profit expectations, including Bank of America (NYSE: BAC) and Wachovia (NYSE: WB). There is some assumption that many banks are trying to take as many write-offs as possible right now given that bad news was expected from them. Multiple mortgages are resetting, the housing industry's slump is worsening, foreclosures are up and interest rate spreads (the difference between what a bank charges lenders and pays depositors) have narrowed. The problem is that nobody still knows just how deep the mortgage rabbit hole runs. Therefore, investors should use a high degree of caution when looking at 2008 forecasts for banks.

Several of the major banks are working on the Master-Liquidity Enhancement Conduit or MLEC. The purpose of this entity would be to provide a mechanism to purchase mortgage-related junk debt and provide a source of credit to financial organizations holding such debt. The idea being that by creating a market of last resort, an outright collapse of the financial system could be avoided. Put another way, say there is a sanitation workers strike and none of the garbage dumps will take your trash. In reaction, you organize your neighbors and agree to combine all of the trash in one place. What is the result? A big pile of stinky trash that you still can't figure out how to get rid of.