SunTrust Stays Very Cautious on Semiconductors: Just 5 to Buy Now


This stock has been on fire over the past year and it remains a top pick across Wall Street. 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 its 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, and while the company was blocked in its attempt to buy Qualcomm, new chip designs are expected to drive future growth.

The analysts noted this in the report when touting the company’s strengths:

Our Buy rating on the company is based on our views that: (1) the diversified nature of the company’s ~20 high-value semi franchises support a 5%+ organic sales compounded annual growth rate through the cycle without a need to identify specific design wins / losses; (2) the company’s outstanding historical track record of value creation from investing in R&D and M&A while constraining costs (that drove a 50% EPS CAGR over the last nine years!) serves as a reasonable basis to expect the company will continue to make intelligent capital allocation decisions; (3) future earnings growth trajectory appears to be high single digits organic, low double digits with buybacks, and higher double digits with M&A; and that (4) relative to this earnings growth, we believe Broadcom’s 10.5x P/E valuation is inappropriate.

Broadcom investors are paid a 3.06% dividend. SunTrust has a $345 price target, and that compares with the posted consensus target of $321.50. The stock closed trading most recently at $228.39 per share.

Microchip Technology

This company is a huge Internet of Things benefactor. Microchip Technology Inc. (NASDAQ: MCHP) is a leading provider of microcontroller, mixed-signal, analog and flash-IP solutions, providing low-risk product development, lower total system cost and faster time to market for thousands of diverse customer applications worldwide.

The company recently received a receipt of antitrust clearance in the United States for the proposed acquisition of Microsemi. The company now expects to complete the acquisition of the company in June of this year. The company noted this about the acquisition:

We believe the company’s acquisition of Microsemi will be significantly accretive and will ultimately exceed management’s guidance, in particular with respect to cross-selling opportunities.

Microchip investors are paid a 1.71% dividend. The $110 SunTrust price target is less than the $111.56 consensus price objective. The stock closed trading at $82.44 apiece on Tuesday.