If any segment has given investors joy this year, it is the semiconductors, and with good reason. The PHLX Semiconductor Sector (SOX) index is up over 40% since February 1. While many on Wall Street are becoming cautious, one analyst remains selectively optimistic on the group and believes some companies still have outstanding upside potential.
In a new research report from Will Stein, the highly respected chip analyst at SunTrust Robinson Humphrey, he acknowledges the potential risk, citing China concerns, data from industrial companies that appears to be slowing, and fears that the strength from the auto sector has also slowed. The report note:
His checks remain positive and semi and component demand is more robust than it was 90 days ago, which typically leads to beats and raises and Will thinks could drive some upside to third quarter and fourth quarter in his diversified names within his coverage universe. Despite the huge run, the group as a whole is still trading at a discount to historical averages, while structural upside to financials for these companies exists in his view.
Three companies may be outstanding buys in front of their upcoming earnings reports.
This stock is still trading way below levels printed last year. Analog Devices Inc. (NASDAQ: ADI) is a leader in the design, manufacture and marketing of analog, mixed-signal and digital signal processing integrated circuits for use in industrial, automotive, consumer and communication markets worldwide. It offers signal processing products that convert, condition and process real-world phenomena, such as temperature, pressure, sound, light, speed and motion, into electrical signals.
The company recently introduced a highly integrated polyphase analog front end (AFE) with power quality analysis designed to help extend the health and life of industrial equipment while saving developers significant time and cost over custom solutions. Achieving extremely accurate, high-performance power quality monitoring typically requires customized development, which can be expensive and time consuming.
Analog Devices investors receive a 2.65% dividend. The SunTrust price target for the stock is $80. The consensus target is $73.55. The stock closed Thursday at $63.47. The company is expected to report earnings on November 22.
This is the combined entity that was formerly known separately as Avago and Broadcom and in a member of the prestigious Merrill Lynch US 1 list. Broadcom Ltd. (NASDAQ: AVGO) is a leading designer, developer and global supplier of a broad range of analog and digital semiconductor connectivity solutions. Its extensive product portfolio serves four primary end markets: wired infrastructure, wireless communications, enterprise storage and industrial and other.
Applications for the company’s products in these end markets include data center networking, home connectivity, broadband access, telecommunications equipment, smartphones and base stations, data center servers and storage, factory automation, power generation and alternative energy systems and displays.
The company produces radio frequency (RF) front-end for LTE-enabled Apple products. Wall Street estimates that the company does 15% of its total business with Apple. Additional estimates are that Avago has between a 13% and 17% revenue exposure to Apple in the wireless communications segment, which was guided up 10% or so quarter over quarter for the third quarter.
With continued consolidation in the sector, some on Wall Street thinks it is entirely possible that the company could also be looking for an acquisition to fill out its product line and increase growth. One company mentioned as a possible candidate is Xilinx. While the chipmaker hasn’t been the focus of sector takeout discussions of late, some analysts have said Xilinx would make a logical acquisition target for a larger peer like Broadcom.
Broadcom investors receive a 1.2% dividend. SunTrust has a $217 price target, and the consensus target is $202.38. Shares closed Thursday at $173.41. The company will report earnings on December 7.
This is a company that could benefit from continued industrial demand and is another of the SunTrust top picks. Microsemi Corp. (NASDAQ: MSCC) offers a comprehensive portfolio of semiconductor and system solutions for communications, defense and security, aerospace and industrial markets. Products include high-performance and radiation-hardened analog mixed-signal integrated circuits (ICs), power management products; timing and synchronization devices and precise time solutions, setting the world’s standard for time; voice processing devices; RF solutions; security technologies and scalable anti-tamper products; Ethernet solutions; Power-over-Ethernet ICs and midspans.
At the company’s most recent Investor Day, Microsemi raised some of its long-term financial forecasts. It expects business to grow organically at 6% to 8% a year and revenues to increase more than $2 billion by 2020. The company also increased its gross and operating margins expectations to 60% or more and 35%, respectively, from 60% and 30% projected earlier.
The company also reviewed a few key areas of growth, and it now expects storage and data center, Ethernet, precise timing ICs, optical transport network processors, aerospace and field-programmable gate arrays to be the catalysts for future continued growth.
The SunTrust price target is set at $51, and the consensus target is $49.20. The shares closed at $38.26. Look for the earnings report on November 3.
While buying shares in front of earnings can always be a risky bet, if any companies look like a good play it would be these three. Aggressive accounts could always buy shares, sell calls on the position and buy out-of-the money puts with the call proceeds for a hedge.