If there is one segment that continues to get dog-piled by bearish analysts and strategists it’s the semiconductors, and the concern is not without some merit. The PHLX Semiconductor Sector Index (SOX) is up 10.9% since the beginning of the year and a stunning 54% since May of 2016. Anyway you cut it, that is a huge move, and the kind of parabolic lift that gets the bears revved up and the negativity flowing.
In a new research report, while Merrill Lynch acknowledges the nosebleed levels at which stocks are trading, the firm makes the case that the semiconductor vendors themselves are very positive about demand, pricing, cost and capacity, which are always the four major areas of concern in what is a highly cyclical arena.
With the Internet of Things still in its beginning stages, the analysts feel that the semiconductors can continue to benefit from the commoditization of traditional hardware. Plus the stocks are growing up to twice as fast and are 50% more profitable than diversified industrial stocks, while trading at a 30% discount.
These five large cap leaders are rated Buy at Merrill Lynch.
This stock has been on fire over the past year and remains a top pick on the Merrill Lynch US 1 list. Broadcom Ltd. (NASDAQ: AVGO) has an extensive semiconductor product portfolio that addresses applications within the wired infrastructure, wireless communications, enterprise storage and industrial end markets. Applications for Broadcom’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.
Top Wall Street analysts like the leadership in the mobile, data center and broadband markets, and especially in the radio frequency (RF) arena. Many on Wall Street see a cyclical rebound in industrial and communications demand. Broadcom will report its most recent quarterly results at the end of this month.
Broadcom investors receive a 1.3% dividend. The Merrill Lynch price target for the stock is $260, and the Wall Street consensus target is $249.06. Shares closed Monday at $220.53.
This old-school chip tech company has come back into favor big-time. Texas Instruments Inc. (NASDAQ: TXN) is a broad-based supplier of semiconductor components, ranging from digital signal processors to high-performance analog components to digital light-processing technology and calculators. Some 65% of Texas Instruments sales are exposed to the well-diversified, business-to-business industrial, automotive, communications infrastructure and enterprise markets.
The company increased its quarterly dividend earlier this year by 32% to $0.50 per share, or $2.00 annualized. The increase reflects its continued strength in free cash flow generation and its commitment to return excess cash to shareholders.
The company reported outstanding earnings for the first quarter and the analysts noted in a recent report:
First quarter beat, and second quarter guidance guide ahead of estimates with broad-based strength across end markets and geographies. Unlike Maxim who signaled some softness in autos, Texas Instruments signaled strength across auto/industrial segments and geographies. Solid balance sheet provides flexibility for mergers and acquisitions or ramping buybacks; we see 15%+ upside to EPS from any US corporate tax reform.
Texas Instrument investors receive a 2.53% dividend. While Merrill Lynch has a $95 price target, the consensus price objective is lower at $85.33. The shares closed Monday at $79.18.