Why SunTrust Says to Buy Automobile-Related Chip Stocks for 2016

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Despite the heavy selling since the beginning of the year, there are still some very positive items tucked away in the books of economists. One of those tasty tidbits is automobile and truck sales. In fact, the U.S. auto industry set a sales record in 2015, as solid December gains by the biggest automakers pushed the annual tally above the 17,402,486 mark set in 2000. So it makes sense that whoever is supplying the big automakers should be doing well also.

A new SunTrust Robinson Humphrey research report makes the case that one way to cash in on the automakers’ success is by buying the semiconductor companies that supply critical chips to the industry. With demand showing signs of improvement, and a pickup expected in the transportation and industrial markets, there could be some big winners.

Four stocks are highlighted in the SunTrust report for investors to consider.

Cypress Semiconductor

This stock has been cut in half in less than a year. Cypress Semiconductor Corp. (NASDAQ: CY) produces high-performance, high-quality solutions for some of the most advanced embedded systems, from automotive, industrial and networking platforms to highly interactive consumer and mobile devices.

The broad, differentiated product portfolio that includes NOR flash memories, F-RAM and SRAM, Traveo microcontrollers, the industry’s only programmable system-on-chip (PSoC) solutions, analog and power management integrated circuits (PMICs), CapSense capacitive touch-sensing controllers and Wireless BLE Bluetooth low-energy and USB connectivity solutions.

The company recently announced an expansion of its automotive portfolio that will help enable manufacturers to bring high-tech automotive systems historically available only in luxury models to mainstream vehicles. Leveraging a wide range of differentiated products that includes microcontrollers (MCUs), PMICs, memories and touch-sensing solutions, the portfolio enables value-added systems for Cypress’s top tier automotive customers.

Cypress shareholders receive a big 5.76% dividend. The Thomson/First Call consensus price target for the stock is $12.27. Shares closed Wednesday at $7.64.


NXP Semiconductors

This is considered a top play for investors looking for a chip stock with Internet of Things exposure, and it is down a stunning 38% from highs printed in June of 2015. The NXP Semiconductors N.V. (NASDAQ: NXPI) merger with Freescale Semiconductor was widely applauded on Wall Street, and many analysts believe the merger can transform the company into a powerhouse.

The merger made NXP the fourth largest semiconductor company in the industry, and the combined company would be the number one supplier in auto semiconductors, number one supplier in global MCUs and a dominant supplier in mobile payments.

NXP is getting its chips into high-growth areas such as contactless mobile payments, the Internet of Things, mobile-phone charging, increased cellular data consumption and LED lighting. The two business segments that cover these products grew 39% and 29% year over year, very impressive numbers.

The company reported very mixed third-quarter results, and the forward guidance was way below what Wall Street was looking for. Some analysts feel that if management can successfully convince investors that its long-term growth targets, which are 10% sales growth and 20% earnings per share growth, are still viable and intact, the huge sell-off could wind up looking like an outstanding buying opportunity. Most Wall Street analysts feel that the company is seeing limited impact from China.

The SunTrust price target for the stock is $105, though the consensus target is $106.29. The stock closed Wednesday at $70.81, up almost 3.5% on the day.