Oppenheimer Stays Selective on Semiconductor Stocks Before Earnings

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It’s been an outstanding run for technology, especially semiconductors. Given the important role the industry plays in our economy, it probably has legs. With that in mind, after a multiyear run, it’s smart for investors to be very selective when putting down their bets, especially in the chip arena.

A new Oppenheimer research piece remains positive on the semiconductors but notes the risks, especially geopolitical ones. Yet, the firm also sees good demand trends and in-line channel inventories for the industry.

In terms of the upcoming earnings, Oppenheimer sees a modest “beat earnings and raise estimates” scenario for most companies it covers, and the report noted this:

Geopolitical noise/uncertainty aside, the group remains in good shape, as the current upcycle moves into year three. Autos, industrials, and power remain standout verticals. Order patterns, particularly in core diversified industrials, appear solid and channel inventories in line. As semiconductors is a global, high-beta group, we see demand adversely affected should a trade war dampen global GDP.

These four stocks rated Outperform are the favorites for free-cash-flow generation and margin expansion/leverage opportunities.

Analog Devices

This stock could very well benefit from an increase in information technology 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 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 that closed last year was extremely positive for the company. In addition, many on Wall Street expect that management ultimately will exceed its $150 million of targeted synergies.

Some believe that the company is poised to report upside to estimates and the multiple owing to Linear Technology related cost savings, de-levering and realistic revenue synergies as Analog Devices applies its superior commercial practices onto the Linear Technology business.

Analog Devices investors receive a 1.95% dividend. The Oppenheimer price target is $110, and the Wall Street consensus target is $108.26. The stock closed Tuesday at $98.54.

Broadcom

This stock has been on fire over the past year and 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 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.

Investors receive a 2.8% dividend. Oppenheimer has a $315 price target, and the consensus target is $312.81. Shares closed Tuesday at $250.56.

Marvell Technology

Last year the company announced a bold $6 billion bid to buy Cavium. Marvell Technology Group Ltd. (NASDAQ: MRVL) is a fabless supplier of mixed-signal and analog semiconductor products to a number of storage, computing and communication applications, including hard disk drives, personal computers, servers, Ethernet switches, printers and connectivity markets.

Top analysts around Wall Street are very positive on the company’s purchase of Cavium, and many feel the deal adds significantly to the growth element for the stock. The addition also helps make Marvell solidly positioned in data center, cloud, enterprise, security and 5G.

The company has cleared the final hurdle to acquire Cavium, as it received the necessary approval from China’s State Administration for Market Regulation. The company expects to complete the merger this month, but the trade issues need to be watched.

Shareholders receive a 1.06% dividend. The $30 Oppenheimer price target compares with a $27.85 consensus price objective. The stock closed Tuesday at $22.66.

Texas Instruments

This old-school tech company offers solid value. 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 recently announced the mass production of its highly integrated, ultra-wideband AWR1642 and IWR1642 mmWave sensors. These sensors support frequencies from 76 to 81 GHz and deliver three times more accurate sensing and the smallest footprint at a fraction of the power of competing sensor technologies. Customers are developing with Texas Instruments mmWave sensors to enable innovation in automotive and industrial applications, including vehicle occupancy detection, people counting in buildings, machine and human interaction and more.

Shareholders receive a 2.18% dividend. The Oppenheimer price target is $130. The consensus target is $121.31, and shares closed Tuesday at $113.73.

These dependable semiconductor stocks represent solid free-cash-flow companies, which is a metric that will be huge going forward as valuations stay elevated. They also are in critical areas that still show solid demand.