Marvell, Chip Sector Gets a Boost From BofA

An analyst upgrade boosted shares of chip maker Marvell Technology Group (MRVL) by as much as 4% in late-morning trading Wednesday.

Bank of America analyst Sumit Dhanda issued a report Wednesday morning that said the chip sector was poised for growth, with increased demand and a stronger production cycle ahead. The analyst raised his rating on Marvell to Buy from Neutral. He also put a Buy rating on Intel (INTC) (up from Neutral), boosted LSI (LSI) to Buy from Underperform, and raised Maxim Integrated Products (MXIM) and National Semiconductor (NSM) to Neutral from Underperform.

Marvell makes communications chips used in many popular consumer gadgets, including Apple (AAPL) iPhone and Research In Motion (RIMM) BlackBerry devices. Its chips are also used in hard-disk drives, Wi-Fi electronics, networking gear and mobile phones. It also derives about 50% of its revenue from hard-disk drives.

Marvell's full-year revenue is pegged at $2.4 billion, according to Wall Street analysts' estimates, but a couple of key developments may bolster its prospects, says Quinn Bolton, an analyst at Needham & Co.

"There's been a lot of chatter that for disk drives, whose production was curtailed earlier, supply is actually getting pretty tight," he says. "If they're going to be in high demand again, then Marvell silicon would be in stronger demand because of orders for PCs."

Marvell is also set to gain market share, thanks to new deals it signed with Seagate Technology (STX) and Hitachi (HIT) that will begin in 2010.

Bottom Line: Buy
This is a cyclical shift for the sector, and a company that's well positioned within it.

DOWN

Discover Seeks to Repay Its Debt to Uncle Sam

Shares of Discover Financial Services (DFS) dove as much as 10% in early trading Tuesday after the credit card issuer said its planning a $500 million public offering in order to help it repay its debt to the U.S. government.

Late Monday, the Riverwoods, Ill.-headquartered company announced it would sell the common stock so it could repay part of the $1.2 billion loan it accepted from the Troubled Asset Relief Program in March. The announcement triggered a selloff Tuesday morning, as investors calculated the dilutive effect the offering would have on the company s stock.

Jefferies & Co. analyst Richard Shane said the latest share issue would be a 10% to 12% increase in its current share count. However, he says, it s a necessary evil for the company, which is "checking the mandatory boxes necessary" to repay the government.

The company also plans to issue debt, which John Stilmar, an analyst at SunTrust Robinson Humphrey estimates to be worth another $750 million. Once Discover pays back the TARP funds, he believes the company should be able to retain a strong capital position. But it will come at a cost. Stilmar says the new shares will take a 10 to 15 cents a share toll on earnings in 2010.

"With the core lending business generating minimal pre-tax earnings in 2010, the retirement of the preferred dividend mutes the dilution from the additional shares, and thus is modestly accretive in 2010," he wrote. "However, as the business recovers, the impact from the increased share count likely becomes more pronounced."

Bottom Line: Hold
Selling into weakness is a mistake, and waiting to see how Discover copes with the coming federal regulations governing credit cards may be the best option for individual investors still holding these shares.