Credit Suisse is out with its outlook for semiconductors in 2013. The report sounds great at first when you hear “Irresistible Cyclical Bottom,” but then you have to realize that it is followed by the phrase “Immutable Slowing Consumer.” Credit Suisse is making some changes to its semiconductor universe. While some calls are cautious, the overall trend here is positive for long-term investors who are trying to find bargains (assuming Credit Suisse is right, of course).
The firm’s analyst John Pitzer said:
We are approaching a bottom in the Semiconductor Cycle. Unfortunately, while cyclical tailwinds are in place, structural headwinds could mute the overall growth off of the bottom. The Cyclical-Structural tug-of-war underpins our anemic estimate for 2013 Semiconductor revenue growth of just +5.2% (prior +7.6%), our ’12-’15 CAGR of +5.1% (prior +8.5%) and expected trough to peak quarterly revenue growth of 12.7% versus normal of 25% to 30%.
Pitzer said that bottoms-up consensus estimates are embedding revenue growth of +3.3% for 2013, but it thinks that estimates will decline. He also noted that the stocks tend to ignore the last estimate reduction. The current next 12 month price to earnings ratio (P/E) of 15.9 is a 30% to 35% discount to the average P/E on trough earnings, but the firm has a more tempered view. He said, “We expect better growth in Analog/Mix-Signal vs. Digital, and prefer Industrial, Auto, Infrastructure (IAI) over Consumer. Analog/Mix Signal outperformance is still in early innings as better growth and stable ROI drive structurally higher valuations.”
The firm’s most nonconsensus call is that the wireless semiconductor growth is perhaps more muted than expected. It sees MPUs having better cyclical growth than expected, and, going against the grain, the firm sees memory supply trends continuing to be extremely favorable. Credit Suisse included its Top 5 Themes and 5 Black Swans Events for 2013, along with views on most of the 24 companies it covers in the space.
In today’s call, Credit Suisse is raising the ratings of Xilinx Inc. (NASDAQ: XLNX) and Analog Devices Inc. (NASDAQ: ADI) to Outperform from Neutral, while downgrading Maxim Integrated Products Inc. (NASDAQ: MXIM) to Neutral from Outperform.
Credit Suisse also listed its Top Semiconductor Picks for 2013 as follows: NXP Semiconductors N.V. (NASDAQ: NXPI), SanDisk Corp. (NASDAQ: SNDK), Linear Technology Corp. (NASDAQ: LLTC), Micron Technology Inc. (NASDAQ: MU) and Analog Devices Inc. (NASDAQ: ADI). Credit Suisse’s top global picks are Taiwan Semiconductor (NYSE: TSM), Samsung and Dialog Semi.
Credit Suisse went on to say that it is maintaining its Outperform rating on Intel Corp. (NASDAQ: INTC), but the firm sees Intel as a range-bound stock between $20 and $24 in the first half of 2013 before ultimately moving higher.