Despite a chorus of voices from financial pundits saying that our economy isn’t as tied to China as many believe, the bottom line is that, for some sectors, it is. One of those sectors is technology, and if a slowdown in China does grow this year, it could make a big difference for some companies that are heavily exposed.
A new research report from RBC makes the case that continued softness in China, combined with a further drop in demand from North America for personal computers and other items and ongoing currency headwinds, and 2016 could be very bleak. While the firm is very positive on some top picks, it does say stock selection is critical this year.
Here are three of the top technology picks from RBC for 2016. All are rated Outperform.
Avago Technologies
This company made big headlines last year with a blockbuster buyout of chip giant Broadcom, and it is the top pick at RBC. Avago Technologies Ltd. (NASDAQ: AVGO), a big provider in cloud/hyperscale data center and networking, was originally a part of Hewlett-Packard. It gets a huge chunk of its business from Apple and Samsung.
The company recently announced it will demonstrate its latest optical transceiver technologies for next-generation data center and enterprise storage applications. As data center networks transition to 100G speeds to support higher bandwidth demands, technical challenges emerge across various levels of the network from storage endpoints to servers to top-of-rack and core switches.
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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. Estimates are that Avago has between a 13% and 17% revenue exposure to Apple in the wireless communications segment. The analysts feel that the company’s content in the iPhone 7 could increase 20% year over year in the latter half of 2016.
RBC likes the leadership in the mobile, data center and broadband markets and also sees a cyclical rebound in industrial and communications demand. The firm thinks that the integration of the Broadcom acquisition, asset sales, a big ramp up in RF and other balance sheet measures could drive earnings from $9.24 estimated for 2015 to as much as $18 by 2018.
Avago investors are paid a 1.27% dividend. RBC has a big $170 price target on the stock. The Thomson/First Call consensus price target is $173.08. Shares closed on Tuesday at $137.52.
Texas Instruments
RBC also likes this old-school chip tech company. Texas Instruments Inc. (NASDAQ: TXN) is a global semiconductor design and manufacturing company that develops analog integrated circuits and embedded processors. The company generates up to 90% of its revenues from its analog and embedded processing businesses, which have well-diversified end-markets (autos, industrial, personal/consumer electronics), long product life cycles and limited capital intensity.
RBC sees this stock as core large-cap holding and cites a solid high-single-digit and very diverse revenue flow, solid capital allocation to lever the balance sheet if needed and substantial room for margin expansion as the ramp up new facilities. The firm also points to sustained impressive cash flow over the past several years that has impressively returned 100% plus of that back to shareholders via stock buybacks and dividends. Given modest capital expenditure requirements coupled with room for margin expansion, Texas Instruments should be able to sustain double-digit free-cash-flow growth despite slower sales growth.
Investors are paid a solid 2.85% dividend. The RBC price objective is $60, and the consensus target is $58.70. The stock closed Tuesday at $53.77 per share.
Microsemi
This company could benefit from continued industrial demand. Microsemi Corp. (NASDAQ: MSCC) offers a comprehensive portfolio of semiconductor and system solutions for communications, defense and security, aerospace and industrial markets. Products include high-performance and radiation-hardened analog mixed-signal integrated circuits and power management products; timing and synchronization devices and precise time solutions, setting the world’s standard for time; voice processing devices; RF solutions; discrete components; security technologies and scalable anti-tamper products; Ethernet solutions; Power-over-Ethernet ICs and midspans.
The company was added to the PHLX Semiconductor (SOX) index late last year and delivered outstanding end of the fiscal year numbers in early November. The company reported record revenue of $328.8 million, which was up almost 4% quarter over quarter. For the fiscal first quarter of 2016, it also guided above prior estimates. Numerous Wall Street analysts also applauded the company’s reiteration of its accretion targets and operating model.
The RBC team sees the PMC-Sierra acquisition closing this quarter and think the deal could add as much as a $1 in calendar year 2017 earnings per share accretion. They also see a more diverse revenue mix, with 21% from the storage silo. They note some investors are concerned over the higher leverage and PMC’s revenue volatility, but they think the company can trade at 12 times earnings of $4.50 for calendar 2017 in the $54 range.
The RBC price target is $45. The consensus target is $44.36. Shares closed Tuesday at $31.28.
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These stocks are more suited for aggressive growth accounts. With that in mind, they all generate solid revenues and have catalysts in front of them for 2016 and beyond that can continue to drive share price.
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