Linear Technology reported decent fiscal first-quarter earnings but gave investors a disappointing forecast for the December quarter, as a seasonal dip in chip demand and the mere threat of a looming U.S. debt ceiling crisis may weigh on upcoming chip orders. We will maintain our fair value estimate and wide moat rating for the firm.

Linear’s analog chip sales were $340 million for the September quarter, up 4% sequentially and near the high end of its forecast range of 2%-5% discussed in July. The firm continued to witness a recovery in chip demand from the cyclical bottom that plagued the industry in late 2012. Demand from automotive customers was especially strong, making up 19% of total orders, and we continue to believe that increased chip content in cars will be one of the strongest long-term growth drivers for the analog chip industry. Linear also cited increased optimism from customers in Japan, an important region for the firm. Profitability remained peerless, as the firm generated a 75% gross margin and 46% operating margin.

For the December quarter, Linear expects sales to be flat to down 4% sequentially, below our prior expectations. Although Linear cited seasonal weakness in chip orders from industrial and auto customers, we were still expecting more room to run in this recent cyclical recovery. Instead, it appears that customers are again taking a cautious stance on new chip orders in light of the U.S. government shutdown and potential debt crisis. Linear indicated that it would have guided to flattish sales if no government concerns existed.

While Linear’s forecast may turn out to be conservative if the cloud over the U.S. budget is lifted, the firm may face a situation similar to late 2011 where government uncertainty may lead to a real decline in chip demand. At recent prices of $40, we think Linear’s stock had fully priced in a cyclical recovery, but Linear’s comments indicate that the debt crisis may limit any last legs in the current upturn.