Despite China Trade Issues, SunTrust Stays Positive on 3 Semiconductor Stocks

May 15, 2019 by 247lee

Source: GeorgHH / Wikimedia Commons
Needless to say, shell-shocked investors are trying to sort out what effect a protracted trade battle with China will have on stocks, especially in the technology arena, and specifically with semiconductors. Some on Wall Street feel there could be a reasonably fast settlement to the divide between the two superpowers, while others feel that both President Trump and China President Xi will dig in their respective heels, not wanting to appear to be weak.

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One thing is for sure, despite the rhetoric and disruption, life for better or for worse will go on, and so will the need for semiconductors. SunTrust semiconductor analyst William Stein and his team have taken a measured and practical approach to the current situation. While hardly pounding the table, they remain realistic and note this:

As trade frictions increase, geographic specialization advantages erode and companies adjust supply chains. When trade frictions began in earnest in late 2018, buyers either switched suppliers, adjusted supply chains, absorbed costs, or canceled projects. As frictions increase in 2019, it’s a similar story. In some cases the initial tariff may make the incremental tariff uneventful, but in other cases the incremental tariff may trigger project cancellations. The net effect will almost certainly be lower estimates for semis.


After noting the risks, they also point out some positives of looking past the current trade concerns:

As we’ve seen in the several months, some investors will take an optimistic stance, look through near-term volatility, triggering powerful recoveries. In recent trading the semi stocks bottomed earlier than they usually do (two quarters prior to fundamentals bottoming, vs. only 1 quarter typically), rallied quickly (peaked in 4 months) and rose 48% (vs. a typical recovery of only 22% in a 4-month period). To us, this was caused by investors’ expecting Trump to set a business-friendly policy, enabling courage to look through any near-term downcycle. We can’t predict this with certainty but it becomes our default expectation looking more than 1-2 quarters out. So, remain flexible. We could tell investors to buy stocks least hurt by trade barriers and sell stocks most hurt by them. Unfortunately, this approach seems to be a recipe to get whipsawed. Instead, we continue to focus our long ideas on stocks with company-specific benefits under-appreciated by investors.

These three top stocks are Buy rated, and the companies have strong franchises that should remain positive for years to come.

Analog Devices

This stock could very well continue to benefit from an increase in information technology and upcoming 5G 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.

In 2017, 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 SunTrust report said this:

Like its peers, the biggest swing factor in the company demand remains the trade negotiations between the U.S. & China. Unlike its peers, Analog Devices fundamentals are benefiting from investments in the communications end market and mergers and acquisitions. Buy for better fundamentals and an ongoing re-rating more aligned with high-performance analog peers.

Analog Devices investors receive a 2.02% dividend. The SunTrust price target for the shares is $126, and the Wall Street consensus target is $117.61. The stock closed Tuesday’s trading at $106.75 a share.

Microchip Technology

Shares of this huge Internet of Things benefactor and have been very strong recently. 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 acquisition of Microsemi in June of 2018 is starting to prove to be a solid addition for the company. Most on Wall Street have felt it is an outstanding addition, but as expected, it has taken some time to integrate fully.

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SunTrust stays very positive on the company and noted this:

Microchip Technology beat first quarter expectations as impressive execution drove margin & EPS upside. While second quarter guidance was below consensus owing to trade-related concerns, we see upside revisions as more likely going forward. Microsemi acquisition related benefits are already ahead of plan and we now expect the company to increase accretion synergies and margin targets when demand improves in earnest.

Microchip pays investors a 1.73% dividend. SunTrust has a price target of $104, which is in line with the consensus price objective of $104.81 The stock closed at $84.66 on Tuesday.

NXP Semiconductors

This is still considered a top play for investors looking for a chip stock with Internet of Things exposure. NXP Semiconductors N.V. (NASDAQ: NXPI) became the fourth largest semiconductor company in the industry after it merged with Freescale in late 2015. It is also important to note that the combined company is the number one supplier in auto semiconductors with a 14% share, as well as the number one supplier in global microcontrollers and a dominant supplier in mobile payments.

NXP continues getting its chips into high-growth areas such as contactless mobile payments, the Internet of Things, mobile phone charging, increased cellular data consumption and LED lighting. Trading at a solid discount to peers, some Wall Street analysts are very positive on the faster earnings growth potential relative to its competition.

The SunTrust analysts pointed this out in the recent report:

NXP beat first quarter expectations owing to a mix of communications infrastructure and handset sales upside, margin strength, and below-the-line benefits. More surprising, the company guided the second quarter not only above-consensus, but also above-normal seasonality. Buy NXP for revenue growth, margin expansion, and capital allocation that should deliver earnings per share growth.

The $123 SunTrust price target for the stock compares with the $114.89 consensus estimate. The shares were last seen trading at $98.17 apiece.

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These three top stocks are in a sector that has been on fire until recently. Given the fact that share prices are now more volatile due to the trade issues, it may make sense to buy smaller positions now and wait and see how things play out. The SunTrust team is right when they say that looking past current issues to the future could be a smart play now.