Like the rest of the market, the technology sector, and specifically the semiconductor arena, has had a very tough go of it this year. In fact, through the end of last week the PHLX Semiconductor Sector (SOX) index, which tracks the chips, was down over 9%, although Monday’s rally certainly helped.
While earnings for the group were hit and miss, investors have stayed focused on very so-so fundamentals. While the big picture may not be exciting, certain areas of the sector are looking very strong.
In a new research report from Deutsche Bank, while remaining neutral on the sector as a whole, the firm has four companies it does like, as the analysts believe the stories behind the companies and valuation make them compelling ideas for investors now. All four are rated Buy, and they are really suited for more aggressive accounts.
This is the combined entity after the merger of Avago Technologies and the old Broadcom. The new Broadcom Ltd. (NASDAQ: AVGO) is a leading designer, developer and global supplier of a broad range of analog and digital semiconductor connectivity solutions. Broadcom’s 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 those 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 it 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. Customer diversity and content for Samsung could be more than enough to offset slower Apple business.
Top Wall Street analysts like the leadership in the mobile, data center and broadband markets, and especially in the RF arena. Many on Wall Street see a cyclical rebound in industrial and communications demand.
Broadcom investors are paid a 1.45% dividend. The Deutsche Bank price target for the stock is $157, and the Thomson/First Call consensus target is set at $170.04. Shares closed most recently at $130.64.
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 is transforming the company into a powerhouse. It made NXP the fourth largest semiconductor company in the industry. It is also important to note that the combined company would be the number one supplier in auto semiconductors, number one supplier in global microcontrollers 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. With shares trading at a massive 40% discount to peers, analysts are very positive on the faster earnings growth potential relative to the competition.
Deutsche Bank has set its price target at $110, above the consensus target price of $104.54. The stock closed Monday at $69.91 per share, up over 5% on the day.
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