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Wednesday, October 18, 2006

Linear and Motorola Signals, Not Noise

By William Trent, CFA of Stock Market Beat

The Wall Street Journal noted that chipmaker Linear Technology (LLTC) acts as an early indicator of industry trends:

According to Lehman Brothers semi analyst Romit Shah, Linear is likely to follow peers National Semiconductor and Maxim Integrated Products which warned last month about weakening demand for analog chips. Shah believes that Linear is a good indicator of the general state of the economy, as they are known for answering customer demand more quickly than their peers. A decline in sales, therefore, would more accurately reflect a real-time decline in market demand.
Romit was right.

Linear Chief Executive Lothar Maier said the business environment was weaker than the company had expected, and bookings fell slightly. Furthermore, Linear provided another example of the inventory glut we have been warning about for months. Although Linear’s sales fell slightly from the previous quarter, inventories rose nearly 8% in the same period.

Since Linear’s major product lines include desktop computers and mobile phones, the outlook also strengthens our concerns for the overall semiconductor sector, which has seen a disproportionate share of its recent strength from the wireless handset market.

That concern is not lessened by Motorola’s (MOT) sales shortfall, which prompted Albert Lin, analyst at American Technology Research to say, “I think the fact the company was light on sales and has 85 percent of its revenue concentrated on cell phones will plague the stock for at least the next several quarters.”

Fasten your seatbelts.

The author may hold a position in the securities discussed. A current list of the author's holdings is available here.

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