Sector Snap: Chip stocks fall as 3Q starts bearish

The Philadelphia Semiconductor Sector Index was down 10.85, or 3 percent, at 357.31 in midday trading. The constituents posting the steepest declines were Infineon Technologies AG--down 98 cents, or 11.5 percent, to $7.55--and SanDisk Corp., which lost $1.33, or 7.1 percent, to $17.37.

The drop came a day after the Standard & Poor's 500 and Nasdaq composite index capped their worst first half since 2002. The Dow Jones industrials finished their worst first half since 1970.

However, not all news in the chip sector was bad. Shares of chip equipment makers Lam Research Corp. and Novellus Systems Inc. rose after a Credit Suisse analyst upgraded the former to "Outperform" from "Neutral."

In a note to investors, analyst Satya Kumar said that cyclical fundamentals in the chip equipment sector have bottomed, with chip makers poised to modestly expand their spending on capital equipment by 10 percent in 2009.

Kumar said a "restructuring and margin expansion story" is developing at Lam Research, naming the company as his top pick in the chip manufacturing sector in the second half of 2008.

He said checks suggest the company has begun a 5 percent reduction in work force, and a restructuring is under way at chip equipment maker SEZ Group, which Lam Research purchased earlier this year.

"We think margin expansion is key for semiconductor capital equipment stocks in the second half of 2008, as there isn't much room to play with on capital expenditure to drive cyclical upside even in 2009," the analyst wrote. "Novellus and Lam Research are at the lowest margin levels among large cap (chip equipment makers) and thus offer best potential for upside."

Novellus was the only stock to rise on the 18-stock Philadelphia Semiconductor Index, adding 17 cents to $21.36. Shares of Lam Research, which is not on the index, rose 79 cents, or 2.2 percent, to $36.94.

Other notable decliners included Advanced Micro Devices Inc., which fell 36 cents, or 6.2 percent, to $5.47. Micron Technology Inc. slid 40 cents, or 6.7 percent, to $5.60.