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

April 25, 2018 by 247lee

All great cycles come to an end, or at the minimum, slow down to more normal growth, and in the case of the semiconductors, it has been the kind of run that few tech sectors have seen in years. While the future remains bright, it may not be the white-hot bright of the past five years that produced outsized gains for investors.

In a new SunTrust Robinson Humphrey research report, William Stein and the outstanding semiconductor team stay the course they have maintained for some time: The sector is slowing as it approaches late cycle, and investors need to be extremely selective.

The report said this when highlighting potential hurdles:

Monday Sanmina delivered the first big supply chain read of the quarter reflecting strong demand and tight supply. While revenue beat consensus by ~2% in the quarter and guide, management noted critical component shortages and what looks like an above seasonal inventory build. We believe this, combined with ongoing investor concerns around handset & crypto demand, could throttle semiconductor growth in 2018.

The analysts prefer five stocks they style as “structural growers” and “Merger/Cost reducers.” They are rated Buy at SunTrust.

Analog Devices

This stock could very well benefit from an increase in information technology (IT) spending. Analog Devices Inc. (NASDAQ: ADI) is a leader in the design, manufacture and marketing of analog, mixed-signal and digital signal processing integrated circuits (ICs) for use in industrial, automotive, consumer and communication markets worldwide. It offers signal processing products that convert, condition and process real-world phenomena, such as temperature, pressure, sound, light, speed and motion, into electrical signals.

Last year the company introduced a highly integrated polyphase analog front end with power quality analysis designed to help extend the health and life of industrial equipment while saving developers significant time and cost over custom solutions. Achieving extremely accurate, high-performance power quality monitoring typically requires customized development, which can be expensive and time-consuming.

The analysts believe that the Linear Technology acquisition, which closed earlier this year, is a huge positive. In addition, many on Wall Street expect that corporate management ultimately will exceed its $150 million of targeted synergies.

The analysts noted this in the report when discussing the acquisition:

We believe the company will see upside to estimates and the multiple owing to (1) Linear Technology related cost savings, (2) de-levering, and (3) realistic revenue synergies as Analog Devices applies its superior commercial practices onto the Linear Technology business.

Analog Devices investors are paid a solid 2.19% dividend. The SunTrust price target for the stock is $86, but the Wall Street consensus target is higher at $103.14. The stock closed above the SunTrust target on Tuesday at $87.65.


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.

Monolithic Power Systems

This off-the-radar play that could be offering continued upside potential is the top small/midcap pick for 2018 at SunTrust. Monolithic Power Systems Inc. (NASDAQ: MPWR) designs, develops and markets integrated power semiconductor solutions and power delivery architectures for consumer, industrial, computing and storage, and communications market segments.

The company offers direct current (DC) to DC converter integrated circuits (ICs) used to convert and control voltages of various electronic systems, such as portable electronic devices, wireless LAN access points, computers, monitors, automobiles and medical equipment.

It also provides lighting control ICs for backlighting that are used in systems, which provide the light source for LCD panels in notebook computers, monitors, car navigation systems and televisions, as well as for general illumination applications. In addition, it offers alternating current (AC)/DC offline solutions for lighting illumination applications and AC/DC power conversion solutions for various end products that plug into a wall outlet.

The analysts said this in the report:

We believe the company will generate a multi-year 20% sales compounded annual growth rate which, combined with expected margin expansion from new products and operating leverage, should deliver high 20’s% EPS growth.

Shareholders are paid a small 1% dividend. The SunTrust price objective is $135, and that compares with the consensus target of $129. The shares ended trading on Tuesday at $119.01.


This company has reported strong earnings over the past two years and remains the top large-cap pick at SunTrust. Nvidia Corp. (NASDAQ: NVDA) is one of the leaders when it comes to supplying graphics processing technology for the 3D graphics market, including desktop graphics processors and gaming consoles.

Nvidia is also moving into visual computing chips for cars, mobile devices and supercomputers. The company has been able to use its ability to leverage past investments, with a more controlled spending structure ahead on unified, which enables strong cash flow that is allowing a focus on capital return, which is currently estimated to be $1 billion next year.

The SunTrust team has stayed bullish on this stock for some time, and noted this in the report:

We believe NVIDIA will outperform owing to revenue and earnings per share upside potential across most segments (especially Datacenter for Artificial Intelligence applications) and a sustained higher price to earnings owing to the scarcity premium for structural growth in large-cap semis. Our price target is based on 36x (12x discount to high-growth technology company peers) our calendar year 2020 EPS, discounted back one year.

Investors in Nvidia are paid a small 0.28% dividend. SunTrust has set its price target at $305. The consensus price target was last seen at $249.58, and the shares closed Tuesday’s trading at $221.20.

I'm interested in the Newsletter

The market and demand for chips are not going away. The rapid growth will slow, so it makes sense to stick with companies that are involved in the business of tomorrow, rather than a commodity type business that can stress average selling prices.