One subsector of technology that has shined brightly this year has been the semiconductors, and with good reason. Strong demand across the board combined with changes in product offerings have created demand, especially in what is now called the industrials. These are companies that sell into the industrial and auto sectors, where demand has skyrocketed. In fact, Merrill Lynch thinks sales for those two sectors could reaccelerate to 7% to 8% annual growth over the next two years, twice the expected growth for the rest of the sector.
A recent research report from senior analyst Vivek Arya makes the case that four top companies will benefit not only from the growth recovery but improved pricing power, and it cites sales reacceleration and consolidation benefits for the industrial/auto chip stocks as an added bonus. Lower tax rates, mergers and acquisitions synergies and solid free-cash-flow generation are also positives.
Here are the four top pick chip stocks to Buy from Merrill Lynch.
This stock has been on a strong run, but still offers solid upside potential. 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 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 are paid a 2.25% dividend. The Merrill Lynch price target for the stock is 85. The Wall Street consensus target is $78.06. The stock closed most recently at $74.53.
This company is a huge Internet of Things benefactor. Microchip Technology Inc. (NASDAQ: MCHP) is a leading provider of microcontroller, mixed-signal, analog and flash-IP solutions, providing low-risk product development, lower total system cost and faster time to market for thousands of diverse customer applications worldwide. The company offers microcontrollers, such as 8-bit, 16-bit and 32-bit microcontrollers under the PIC brand name and 16-bit dsPIC digital signal controllers, as well as provides microcontrollers for automotive networking, computing, lighting, power supplies, wireless communication and wireless audio applications.
The company announced last year that its MOST 50 Intelligent network Interface Controllers are powering the infotainment systems of the new Toyota Alphard executive-lounge hybrid vehicles. This is the latest deployment among a wide variety of the Toyota’s brands, which have used MOST50 in their infotainment systems for many years, including both volume and luxury vehicles. In the new Alphard implementation, Toyota is using MOST technology to ensure high-quality digital audio streaming throughout the vehicle.
Investors receive a 2.2% dividend. Merrill Lynch has a $75 price target for the stock, and the consensus price objective is $69.60. The stock closed on Tuesday at $66.03.
This smaller capitalization stock may be just the ticket for more aggressive accounts. On Semiconductor Corp. (NASDAQ: ON) manufactures and sells semiconductor components for various electronic devices worldwide. Its Application Products Group segment provides analog, mixed-signal and advanced logic application specific integrated circuit and application specific standard product solutions; and solutions for voltage and current options, as well as foundry and manufacturing services, including integrated passive devices technology, integrated circuit (IC) design, packaging, and silicon technology offerings.
The company’s Sigfox portfolio provides an important enabler for the implementation and proliferation of Internet of Things applications across an almost limitless number of market sectors, including smart energy. The portfolio includes certified modules with protocol software stacks, transceivers, microcontrollers and System-on-Chip (SoC) solutions. In addition, a range of hardware and software development tools are available to help speed and ease new designs for customers.
The Merrill Lynch price objective is posted at $14, while the consensus target is $14.22. The shares closed most recently at $11.91.
This old-school chip tech company was out of favor but has come back solid. Texas Instruments Inc. (NASDAQ: TXN) is a global semiconductor design and manufacturing company that develops analog integrated circuits and embedded processors.
The company generates 80% to 90% of its revenues from its analog and embedded processing businesses, which have well-diversified end-markets (autos, industrial, personal/consumer electronics), long product life cycles and limited capital intensity. The company has 6% market share of the auto chip market.
Numerous Wall Street pros see the stock as core large cap holding, and they cite a solid high-single-digit and very diverse revenue flow, solid capital allocation to lever the balance sheet if needed, and substantial room for margin expansion as the ramp up new facilities. The company boasts sustained impressive cash flow over the past several years and has impressively returned 100% plus of that back to shareholders via stock buybacks and dividends.
Texas Instruments posted strong third-quarter numbers and also increased its quarterly dividend by 32% to $0.50 per share, or $2.00 annualized. The increase reflects the company’s continued strength in free cash flow generation and its commitment to return excess cash to shareholders.
Top analysts cite the potential for reduced corporate taxes, the infrastructure spending potential and increased defense spending all as positive for the chip giant.
Texas Instrument investors are paid a 2.69% dividend with the new increase. The $82 Merrill Lynch price target is well above the consensus price objective of $74.34. The stock closed Tuesday at $74.40 a share.
Given the pricey nature of the sector as a whole, it makes sense to go with the chip companies that have the best growth prospects over the next couple of years. Investors may want to buy partial positions here and see if we don’t get a pullback in early 2017.