Merrill Lynch's Top Semiconductor Stocks to Buy

Merrill Lynch is out with its top picks in the semiconductor sector. The team’s analysts are Vivek Arya and Adam Gonzalez, and the report features their Underperform picks as well.

The two analysts continue to be positive on the semiconductor sector. They see tailwinds from a macroeconomic pick-up, rising content in all end markets, a disciplined supply chain and an accelerating pace of consolidation among the 60 or so semiconductor companies that are vying for a $300 billion market.

Analog Devices Inc. (NASDAQ: ADI) was given a $64 price target, versus a consensus of closer to $57 and a $55.13 close. This is valuing it at 21.5 times 2015 expected earnings, a slight premium to its five-year median. This is due to structural growth opportunities in auto, industrial and wireless infrastructure, a defensive business model and a lowered consumer exposure. Investors also get a 2.6% dividend yield.

Intel Corp. (NASDAQ: INTC) was featured positively after its latest revenue guidance was hiked. Merrill Lynch has a $34 price objective, based on 16.2 times the expected 2015 earnings estimates. This valuation is slightly below the earnings midpoint value due to Intel having a slower growth on the top line. The consensus price target is $29.64, and Intel has a 3% dividend yield.

Avago Technologies Ltd. (NASDAQ: AVGO) was given an $85 price target, based on 15 times the 2015 expected earnings and on $200 million to $250 million in cost synergies with LSI. It trades at $71 now, and the consensus price target is almost $80. Its dividend yield is 1.6%.

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NXP Semiconductors N.V. (NASDAQ: NXPI) was given a $76 price objective. It is at $63 now, and the consensus price target is a dime under $70. This call is based on a sum of parts analysis with high growth and high value in identification and security, as well as consumer and traditional analog. NXP does not have a dividend.

RF Micro Devices Inc. (NASDAQ: RFMD) was given a $11 price target, up from a $9.85 close and from a consensus price target of almost $10.50. The Merrill Lynch target is based on only 14 times expected 2015 earnings. This is a premium to its five-year historical median due to the synergies with TriQuint. RF Micro pays no dividend.

Skyworks Solutions Inc. (NASDAQ: SWKS) was given a $55 price target, based on 15-times expected 2015 earnings. The stock closed at $47.53 and its consensus price target is just a few cents under $51.94. Merrill Lynch’s upside view is based on improving industry fundamentals, new products, a higher exposure in China and a diversified high-performance analog business offset by customer concentration at large original equipment manufacturers and stiff competition in the RF marketplace for key high-volume sockets.