Technology

Analyst Top Chip Picks With Double-Digit Earnings Growth Potential

Lee Jackson

Published: June 15, 2016 10:05 am

Last Updated: January 13, 2020 6:47 am

Despite the recent weakness in the markets, the one bright sector with potential for the rest of 2016 is technology, and a sub-sector in which there is some outstanding potential is the semiconductor arena. The old-school leaders are still meaningful players, but newer companies that are more alpha driven via restructuring and acquisitions are making waves and may yet prove to be the best stocks for investors to consider.

A new research piece from the team at SunTrust Robinson Humphrey notes that on the firm’s recent semiconductor bus tour several companies indicated to them that consolidation in the chip space has led to flattening and even rising average selling prices in some instances.

The SunTrust analysts have three top picks that they think are not only the cheapest, but the fastest growing, and all three are rated Buy.

Broadcom

This is the combined entity that was formerly known 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 the company has between a 13% and 17% revenue exposure to Apple in the wireless communications segment, which was guided up 10% or more quarter over quarter for the third quarter. Customer diversity and content for Samsung could be more than enough to offset slower Apple business.

Top Wall Street analysts like the leadership in the mobile, data center and broadband markets, and especially in the RF arena. Many on Wall Street see a cyclical rebound in industrial and communications demand. The SunTrust analysts think the company is growing earnings at 13% organically, and that could lift to 17% with mergers and acquisitions. Trading at 12.5 times 2017 estimated earnings, the stock is cheap.

Broadcom investors are paid a 1.26% dividend. The SunTrust price target for the stock is a stunning $211, and Thomson/First Call consensus price target is set at $192.07. The stock closed Tuesday at $158.99.
Microsemi

This is a company that could benefit from continued industrial demand and is another of the SunTrust top picks. 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 (ICs), power management products; timing and synchronization devices and precise time solutions, setting the world’s standard for time; voice processing devices; RF solutions; security technologies and scalable anti-tamper products; Ethernet solutions; Power-over-Ethernet ICs and midspans.

The company reported outstanding fiscal second-quarter adjusted earnings that surpassed consensus estimate of analysts. Revenues were up 35.0% sequentially and 50.0% year over year, driven by strong growth across all the company’s end markets. Revenues were essentially in line with Wall Street estimates. The SunTrust team sees continued double-digit earnings growth, and trading at 8.5 times estimated 2017 consensus numbers, the stock is also extremely cheap.

SunTrust has a $49 price objective for the stock, and the consensus target price is lower at $45.50. The shares closed most recently at $33.95.

NXP Semiconductors

This company is considered a top play for investors looking for a chip stock with Internet of Things exposure, and it is still down a stunning 22% from highs printed in June of 2015 and is the top pick at many Wall Street firms. The NXP Semiconductors N.V. (NASDAQ: NXPI) merger with Freescale Semiconductor was widely applauded on Wall Street, and many analysts believe the merger is transforming the company into a powerhouse. It made NXP the fourth largest semiconductor company in the industry.

It is also important to note that the combined company has become the number one supplier in auto semiconductors, number one supplier in global microcontrollers, as well as a dominant supplier in mobile payments.

NXP is 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. With shares trading at solid discount to some of its peers, many analysts are very positive on the faster earnings growth potential relative to the competition.

The SunTrust team feels that the company has a huge 15% organic earnings compound annual growth rate, but like the others, trading at 12 times consensus 2017 earnings estimates, it too is cheap.

The SunTrust price target for the stock is set at $104, and the consensus target is $109.33. The stock closed most recently at $87.37 per share.

SunTrust is not alone in its praise of these three top companies. All of them are widely covered on Wall Street and most firms are very bullish. While they are only suitable for aggressive growth accounts, interested investors may want to buy small starting positions and see if the market does not continue to back up some to add more later.