4 Top Semiconductor Analyst Picks as Sector Remains Red Hot

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Microsemi

This company could benefit from the continued industrial demand. Microsemi Corp. (NASDAQ: MSCC) offers a comprehensive portfolio of semiconductor and system solutions for communications, defense and security, aerospace and industrial markets.

Products include high-performance and radiation-hardened analog mixed-signal integrated circuits (ICs), power management products; timing and synchronization devices and precise time solutions, setting the world’s standard for time; voice processing devices; RF solutions; security technologies and scalable anti-tamper products; Ethernet solutions; Power-over-Ethernet ICs and midspans.

While it hasn’t actually announced a deal, the company is said to still be running a sale process after receiving takeover interest from Skyworks Solutions, according to people familiar with the matter. Microsemi hired Bank of Montreal last year to run a broader auction after Skyworks offered to buy the company, the people said, asking not to be named because the negotiations are private. The process is in the early stages, no deal is imminent and a transaction may not occur.

The analysts’ report noted:

We envision three ways for investors to profit in the company: (1) if the company executes reasonably well towards its 6-8% organic sales growth target, it should deliver revenue and earnings-per-share upside, lower financial leverage, and should be rewarded with a higher P/E multiple; (2) if the company pursues another acquisition after achieving 3.0x leverage (we estimate potentially in the first half of 2017) it will not likely achieve P/E multiple expansion, but will benefit from higher EPS estimates; (3) if the company is acquired, which management has openly discussed.

The $68 SunTrust price target compares with the consensus target of $63.91. Shares closed Tuesday at $53.32.

Avnet

The analysts see this company as the sleeper in the bunch, as they think it is ignored by investors and Wall Street. Avnet Inc. (NYSE: AVT) and its subsidiaries distribute electronic components, enterprise computer, networking and storage products and software, IT solutions and services, and embedded subsystems in the Americas, Europe, the Middle East, Africa and the Asia-Pacific. It operates through two segments.

The Electronics Marketing segment markets and sells semiconductors; interconnect, passive and electromechanical devices; and embedded products for the electronic component manufacturers, as well as offers services that enable customers to evaluate, design-in and procure electronic components throughout the lifecycle of their technology products and systems.

The Technology Solutions segment creates and delivers data center and IT lifecycle solutions that solve the business challenges of end-user customers. This segment also provides value-added distribution of enterprise computing servers and systems, software, storage, services and complex solutions; and hard disk drives, microprocessors, motherboards and DRAM module technologies to personal computing integrators and value-added resellers.

The analyst pointed out:

The new CEO recently unveiled a strategy to create value including a renewed focus on (a) acquisitions and (b) more profitable revenue. Although we dislike negative earnings revisions resulting from divestitures, the company’s model will look much improved by 2018.

Investors receive a 1.46% dividend. The SunTrust price objective is $53. The consensus target is $48.39. Shares closed Tuesday at $46.66.

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While the huge upside is probably gone, all these companies offer aggressive investors some good potential for gains. It may be smart to buy partial positions here and see if we don’t get a pullback in the shares.