Technology

Deutsche Bank Has 5 Top Pick Chip Stocks to Buy for 2017

If there was one segment that has had a great 2016, it is the semiconductors. After a slight pause in the first half of the year, the PHLX Semiconductor Sector Index (SOX), which tracks the top chip stocks, had its best second-half relative performance in over a decade. With valuations also the highest in a decade, there is a conundrum for investors who want to stay involved: sell now and look for the market to back up, or stay in but be very selective.

In a new research report, the outstanding team of chip analysts at Deutsche Bank remain neutral on the stocks due to the elevated valuation, but they do stress the importance of selectivity. They also favor what they call “reasonably valued self-help,” or companies that can help profitability via either mergers and acquisitions or internal organic growth.

Five stocks are rated Top Picks at Deutsche Bank, and all make good sense for aggressive accounts looking to stay long the chip area.

Broadcom

This stock has been on a roll this year and is expected to trade even higher. 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. 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.

The analysts noted in their report:

We view this discount to high-quality peers as an appropriate valuation as it reflects Broadcom’s leadership positions in Wired/Wireless Communications as well as its strong profitability (target Gross margins/Operating margins of 60%+/45%, respectively), somewhat offset by the company’s customer concentration (Apple 20%) and higher debt load.

Broadcom investors receive a 2.3% dividend. The Deutsche Bank price target for the stock is $225. The Wall Street consensus price target is $211.45. Shares closed Wednesday at $177.62.

Maxim Integrated Products

This company supplies chips to Samsung for the Galaxy line. Maxim Integrated Products Inc. (NASDAQ: MXIM) designs, develops, manufactures and markets various linear and mixed-signal integrated circuits worldwide. The company also provides a range of high-frequency process technologies and capabilities for use in custom designs. It primarily serves automotive, communications and data center, computing, consumer and industrial markets.

Deutsche Bank noted:

Our price target is based on an ex-cash P/E of ~19x our calendar year 2017 estimated earnings-per-share, in line with high-quality Analog peers to reflect Maxims accelerating revenue growth, improving profitability, and overall solid execution. The company’s still viable take-out potential and ~3% dividend yield, coupled with elevated peer valuations, also support our target multiple.

Shareholders receive a 3.4% dividend. Deutsche Bank has a $45 price target, and the consensus target is $42.02. Shares closed at $38.64 yesterday.

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