Citigroup’s Glen Yeung this morning turned positive on the chip sector, asserting that the sector has reach the right point in the cycle to jump in for the next upturn.

Yeung uses the 1990-91 downturn as a model for the current period, and concludes that “the risk/reward has now become favorable” for select names in the group. “It is optimal to invest ahead of the report of [the] first quarter of year-over-year GDP growth,” he writes, adding that current valuations are near 1990 troughs.” In a research note this morning, Yeung also contends that “estimate capitulation has occurred.” His bottom line: now is the right time to invest in semi names.

In connection with the call, he upgrades Integrated Device Technology (IDTI), Nvidia (NVDA) and STMicro (STM) to Buy from Hold. Yeung’s colleague, Craig Ellis, who covers specialty semis, raised Fairchild (FCS) to Hold from Sell, and National Semi (NSM) to Buy from Hold.

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While SanDisk (SNDK) shares continue to trade sharply higher after Samsung said it is considering making a bid for the company, some analysts are cautioning that the notion of merging the two companies is far from a sure thing, and would involve substantial complications.

Craig Ellis, an analyst with Citigroup, says he’s skeptical that Samsung would really want to buy the company, and finds the probability of a deal to be “low.” He notes that a deal would put an end to Samsung’s royalty payments to SanDisk for NAND flash, which he sees at $414 million in 2008, $309 million next year and $215 million in 2010; and it would provide Samsung with system memory patents on which SanDisk generates substantial royalties.

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Shares of flash memory chipmaker SanDisk (SNDK) are falling $1.89, almost 11 percent, to $15.75 this afternoon following a note by Citigroup analyst Craig Ellis today that says 2009 earnings estimates are in jeopardy for the company because contract prices for flash are plummeting. The stock had shown some improvement of late, rising 18 percent since the end of July as investors speculated that the worst news is over in this year’s collapse in flash prices.

Apparently, it isn’t. Ellis writes that contract pricing in the current quarter looks on track to fall 22 percent, “worse than our SanDisk royalty model [of] down 10 percent.” As a result, Ellis says product gross margin for the fourth quarter of this year and for all of next year could be 1 to 3 percentage points lower than the Street’s modeling.

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