Investing

Merrill Lynch Adds Top Financial Services Stock to US 1 Portfolio

Lee Jackson

Published: October 26, 2016 9:55 am

Last Updated: January 13, 2020 1:54 am

With earnings for the third quarter still coming hot and heavy, and the fourth quarter of 2016 in full swing, many of the top companies we follow on Wall Street are making some changes to the lists of their high conviction stock picks for clients. With the market continuing to trade to near all-time highs, it makes sense to examine the lists and make some changes as the rest of the year could have additional volatility as the political cycle could prove to be very volatile component.

In a recent research note, the analysts at Merrill Lynch have added PNC Financial Services Group Inc. (NYSE: PNC) to the firm’s well-respected US 1 list of stocks to Buy. It replaces First Republic Bank (NYSE: FRC), and PNC is offering investors a solid entry point.

PNC Financial Services is one of the country’s largest diversified financial services organizations. It provides retail and business banking; residential mortgage banking; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; and wealth management and asset management. With consistent earnings growth and a very positive and growing loan portfolio, the company is a premiere super-regional bank stock to own.

Wall Street analysts point to numerous positives, including the bank implementing huge cost savings plans. The bank is working on up to $100 million of new savings announced last year, and it is also applauded for outstanding credit/risk management and the limited exposure to the capital markets related areas, while focusing on traditional banking.

Merrill Lynch feels the underperformance this year makes the stock very attractive, and note the savings initiative, and the move to digitization as positives to what is very solid banking story. And PNC shareholders receive a very solid 2.43% dividend.

While First Republic Bank was removed from the list, the analysts remain positive on the company and keep a Buy rating. The bank provides private banking, private business banking, real estate lending and wealth management services to clients in metropolitan areas of the United States. Shareholders receive a small 0.85% dividend.

The company offers deposit products, such as checking, money market checking, savings and passbook deposits, as well as certificates of deposit. It also provides a range of lending products that comprise residential mortgage loans and lines of credit, multifamily loans, commercial real estate loans, residential construction loans, personal loans, business loans and smaller loans and lines of credit to businesses and individuals.

The Merrill Lynch price target on PNC is $100, while the Wall Street consensus target is $96.80. Shares closed Tuesday at $93.14.

On First Republic, the Merrill Lynch has an $85 price target. The consensus target is $79.40, and shares closed at $75.48.

In addition, here are the three top technology stocks in the portfolio.

Broadcom

This is the combined entity that was formerly known separately as Avago and Broadcom. Broadcom Ltd. (NASDAQ: AVGO) is a leading designer, developer and global supplier of a broad range of analog and digital semiconductor connectivity solutions. Its extensive product portfolio serves four primary end markets: wired infrastructure, wireless communications, enterprise storage and industrial and other.

Applications for the company’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.

The company produces radio frequency (RF) front-end for LTE-enabled Apple products. Wall Street estimates that the company does 15% of its total business with Apple. Additional estimates are that Avago has between a 13% and 17% revenue exposure to Apple in the wireless communications segment, which was guided up 10% or so quarter over quarter for the third quarter.

With continued consolidation in the sector, some on Wall Street thinks it is entirely possible that the company could also be looking for an acquisition to fill out its product line and increase growth. One company mentioned as a possible candidate is Xilinx. While the chipmaker hasn’t been the focus of sector takeout discussions of late, some analysts have said Xilinx would make a logical acquisition target for a larger peer like Broadcom.

Broadcom investors receive a 1.16% dividend. The $215 Merrill Lynch price target compares with the consensus target of $202.38. Shares closed Tuesday at $173.65. The company is set to report earnings on December 7.

Lam Research

This company remains one of the top chip equipment picks across Wall Street. Lam Research Corp. (NASDAQ: LRCX) designs, manufactures, markets, refurbishes and services semiconductor processing equipment used in the fabrication of integrated circuits. The company offers plasma etch products that remove materials from the wafer to create the features and patterns of a device.

Many Wall Street analysts have highlighted the company and its peers as having a significant equipment opportunity from the NAND evolution as well. Lam Research also appears well positioned to gain share in the wafer fab equipment (WFE) market, driven by a strong focus on technology inflection spending over the next few years.

Despite so-so foundry and logic spending in the past year, many on Wall Street think that Lam Research also will continue to benefit from technology transitions such as FinFET, 3D NAND, multi patterning and advanced packaging in 2015 and beyond. Many analysts believe it is the “cleanest” semi cap story benefiting from cyclical tailwind, SAM expansion and share gains.

The company reported solid third-quarter results, and Merrill Lynch was very impressed with the solid guidance for the fourth quarter. The analyst also points to the company’s analysts day in November, when it could announce a $1 billion stock buyback program.

Shareholders receive a 1.21% dividend. The Merrill Lynch price objective is $115. The consensus target is $111.28. The shares closed Tuesday at $98.07.

Qualcomm

This top technology stock has done very well this year and the company recently finished a bid for NXP Semiconductors. Qualcomm Inc. (NASDAQ: QCOM) is a world leader in 3G, 4G and next-generation wireless technologies. The company includes the licensing business, QTL, and the vast majority of its patent portfolio. Its subsidiary Qualcomm Technologies operates substantially all of Qualcomm’s engineering, research and development functions, as well as substantially all of its products and services businesses, including its semiconductor business, QCT.

The growth of 3G mobile technologies in emerging markets, like China and India, has had a positive impact on Qualcomm and could be a difference maker going forward. Qualcomm is and has been for years a market leader in the development of 3G CDMA (Code Division Multiple Access) technologies. The company recently developed an LTE chipset that supports SCDMA (Synchronous Code Division Multiple Access) technology. China’s mobile network runs on this, and it could provide the company with a huge leg up in years to come.

Qualcomm reported third-quarter revenue and earnings that beat Wall Street estimates. Fourth-quarter guidance was also better than expected. In China, new semiconductor products are gaining share and management is making better progress with royalty collections.

Investors receive a 3.22% dividend. Merrill Lynch has a $68 price objective, while the consensus target is $65.02. Shares closed Tuesday at $67.71.

While the US 1 list has slightly underperformed the S&P 500 year to date, it has outperformed it since inception by a large margin. The stocks are among the highest conviction picks at Merrill Lynch and make good additions to any growth portfolio.