With the market continuing to seemingly seesaw back and forth on every headline or pundit quote, one thing is for sure: the waters will remain murky to some degree until the presidential election is settled. One solid area for aggressive investors to continue to look at is the semiconductor arena. With the PHLX Semiconductor Sector (SOX) index, which tracks the companies in the sector, up just under 5% this year, the top companies are making slow but steady progress.
A new Wedbush report highlights some of the stocks on the firm’s 14th annual Silicon Valley semiconductor bus tour, during which analysts met with 12 leading chip companies over a period of two days. We screened the Wedbush report and found four stocks rated Outperform that look to have solid upside potential.
Cypress Semiconductor
This stock has been cut almost in half in less than a year. Cypress Semiconductor Corp. (NASDAQ: CY) produces high-performance, high-quality solutions for some of the most advanced embedded systems, from automotive, industrial and networking platforms to highly interactive consumer and mobile devices.
The broad, differentiated product portfolio that includes NOR flash memories, F-RAM and SRAM, Traveo microcontrollers, the industry’s only programmable system-on-chip (PSoC) solutions, analog and power management integrated circuits (PMICs), CapSense capacitive touch-sensing controllers and Wireless BLE Bluetooth low-energy and USB connectivity solutions.
The company announced late last year an expansion of its automotive portfolio that will help enable manufacturers to bring high-tech automotive systems historically available only in luxury models to mainstream vehicles. Leveraging a wide range of differentiated products that includes microcontrollers (MCUs), PMICs, memories and touch-sensing solutions, the portfolio enables value-added systems for Cypress’s top tier automotive customers.
The company beat first-quarter earnings estimates and raised its forward guidance. In addition the chief executive officer is stepping down, and the company will spend over half a billion for Broadcom’s Internet of Things business. Cypress also repurchased $182.5 million in common stock, under its $450 million repurchase authorization approved two quarters ago.
Cypress shareholders receive a big 4.28% dividend. The Wedbush price target for the stock is $11, and the consensus price target is $10.75. Shares closed Thursday at $10.29.
Integrated Device Technology
This top company has traded sideways for almost three months and it looks to be ready to make a move higher. Integrated Device Technology Inc. (NASDAQ: IDTI) develops system-level solutions that optimize its customers’ applications. IDT’s market-leading products in radio frequency (RF), timing, wireless power transfer, serial switching, interfaces and sensing solutions are among the company’s broad array of complete mixed-signal solutions for the communications, computing, consumer, automotive and industrial segments.
The company has seen some recent Wall Street upgrades, and the Wedbush team remains positive, as they feel sales of semiconductors to data centers will “show upside” in the second half of the current fiscal year 2017. In addition, company management is targeting a long-term goal of producing “30 percent annual free cash flow” margins on its revenue. At its current revenue run-rate of $666 million, that works out to $200 million in annual free cash flow, which would be enough to drop its price-to-free-cash-flow ratio to less than 15. That is low for a company growing at 19%.
Wedbush has a $28 price target, the same as the consensus estimate. The stock closed Thursday at $22.21.
NVIDIA
This is a top chip stock that reported stellar earnings last month. NVIDIA Corp. (NASDAQ: NVDA) is one of the leaders when it comes to supplying graphics processing technology for the 3D graphics market, including desktop graphics processors and gaming consoles.
NVIDIA is also moving into visual computing chips for cars, mobile devices and supercomputers. The company has a technology partnership with electric car maker Tesla Motors. It has been able to use its ability to leverage past investments, with a more controlled spending structure ahead on unified, which enables strong cash flow that is allowing a focus on capital return, which is currently estimated to be $1 billion next year.
Top Wall Street analysts feel the stock is maturing to a platform company from a pure chip company, and Wedbush sees the stock continuing to benefit from four secular trends: virtual reality, PC gaming, chips in the automobile industry and graphic processing units (GPUs) in the cloud.
Wedbush also likes the company’s long-term prospects in its core markets, which is offset to some degree by some legacy declines. Some on Wall Street do note the ongoing litigation with Qualcomm and Samsung as a potential negative, as well as the uncertainty surrounding Intel royalties, but they view the company as transforming.
NVIDIA investors receive a 1.12% dividend. Wedbush raised its price objective to $52 from $42, and the consensus target is $43.98. The stock closed Thursday at $47.55.
Texas Instruments
This is an old-school chip tech company that is also a sizable auto chip player. Texas Instruments Inc. (NASDAQ: TXN) is a global semiconductor design and manufacturing company that develops analog integrated circuits and embedded processors. The company generates 80% 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. The company has 6% market share of the auto chip market.
Numerous Wall Street pros see the stock as core large cap holding, and they cite 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 company boasts sustained impressive cash flow over the past several years and 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.
Texas Instrument investors receive a 2.47% dividend. The $65 Wedbush price target compares with the consensus target of $62.32 and the most recently closing price of $62.06.
While all these top companies look attractive, we continue to stress that the market is rich pricewise, and there is a host of headline possibilities that can increase volatility. We suggest nibbling at shares now and looking for a better entry point as the market could back up.
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