It seems like it would be safe to say that when 2016 started nobody saw the huge run coming in the semiconductor stocks, especially the ones that were more skewed to industrial applications. But rip they did, and investors that were long got a very nice — in some cases huge — payback. The question now is whether they can sustain another year like 2016, or is the big move over?
SunTrust Robinson Humphrey analysts deserve a victory lap as they called the industrialization of the sector at the start of last year, and in new research they picked some strong winners for investors. Here’s the analyst’s overall take in a new report:
In early 2016, we formalized our Industrialization of Semis thesis, which argued that semi investors have placed too much emphasis on safety metrics, and not enough on growth metrics. Revisiting that thesis one year later, we reiterate that growth is still undervalued in semis.
Three stocks remain favorites at the firm, and they all still look good for aggressive growth accounts.
This stock has been on a roll over the past 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.
Top analysts on Wall Street think the Brocade acquisition could be materially accretive to Broadcom earnings once the deal closes in late 2017. While purchase accounting rules, acquisition and restructuring costs, and potential divestitures could muddle Brocade’s contribution to Broadcom during the first year after the deal closes, on a normalized run-rate basis, some estimate that Brocade would contribute $1.40 or so to Broadcom’s earnings per share in calendar year 2018, estimated when the $250 million in run-rate synergies are fully achieved, resulting in about 10% accretion to current earnings per shares estimates.
SunTrust noted this:
Broadcom is our favored way to invest in our industrialization of semis theme – Rolling valuation to use our 2018 model; no change to estimates or price target. Broadcom continues to exemplify our industrialization of semis theme: we expect acquirers to outperform as they consolidate the cost base in the still-too-fragmented semi industry. Despite recently doubling its dividend and raising its dividend payout ratio target to 50%, we believe the company’s cash flow can continue to fund meaningful acquisitions.
Shareholders receive a 2.31% yield. The SunTrust price target for the stock is $227, and the Wall Street consensus target is $211.68. The stock closed yesterday at $178.34.