Chip stocks up on Analog Devices

SAN FRANCISCO (Reuters) - Shares in companies that make microchips rose on Thursday as investors cheered a bullish outlook from Analog Devices Inc. (ADI.N), which led the sector with a gain of nearly 10 percent.

The strong quarterly revenue forecast from Analog Devices was the latest sign that the industry's main customers -- makers of consumer electronics, computers, telecommunications gear and industrial equipment -- have worked through high inventory levels.

"Given that analog names have suffered the most from the inventory burn-off and have the lowest expectations for 2007, we believe this could mark an inflection point for the sector," Credit Suisse analyst Michael Masdea wrote in a note.

The Philadelphia Stock Exchange's semiconductor index .SOXX rose 2 percent to 482.77 in early afternoon trading, its highest level since January 11.

Rivals of Analog Devices also posted strong share price gains on Thursday.

Linear Technology Corp. (LLTC.O) jumped 8.8 percent, Maxim Integrated Products Inc. (MXIM.O) rose 7 percent, National Semiconductor Corp. NSM.N gained 6.7 percent, and Texas Instruments Inc. TXN.N rose 2.8 percent.

Merrill Lynch analyst Joe Osha sounded a more cautious note, saying that there was little room for further improvement in Analog Devices' operations.

"We continue to believe expectations for improvement are getting ahead of reality," Merrill Lynch Joe Osha wrote in a research note. "There's not that much gross margin upside left."