Technology

Deutsche Bank Has 4 Top Pick Semiconductor Stocks to Buy Into Earnings

Lee Jackson

Published: January 22, 2018 8:45 am

Last Updated: January 12, 2020 4:16 am

Sometimes when a rally gets hyper-extended, the last money in are retail dollars chasing the performance. In the case of the semiconductors, after an incredible 2017, that indeed may be the case. The key for investors is realizing that there is tremendous value in the sector and huge opportunity going forward. The trick for 2018 is more than just owning various companies. It is owning companies with a degree of value and solid upside potential.

A new report from the semiconductor crew at Deutsche Bank notes that the PHLX Semiconductor Sector (SOX) index rose a stunning 38% in 2017, almost twice the move of the S&P 500. The analysts cited rising average selling prices in memory, strong capital expenditures and very solid macro demand.

With the SOX index up yet again to start 2018, they are positive, but cautious, and here’s why:

When combined with the SOX already being ~43% above its 5yr avg relative to the S&P, we expect the outperformance in semi sector stocks to moderate, if not reverse, in 2018. Consequently, we believe semi investors should take an increasingly conservative posture, focusing on names with defensive attributes such as self-help-driven margin expansion potential and discount valuations.

The Deutsche Bank analysts have four Top Pick stocks to buy, and all make sense for aggressive growth accounts looking to add or increase semiconductor exposure.

Intel

This leader in semiconductors is working hard to scale away from dependence on personal computers, and the Internet of Things and data center cloud spending are a big part of the shift. Intel Corp. (NASDAQ: INTC) designs, manufactures and sells integrated digital technology platforms worldwide. It operates through Client Computing Group, Data Center Group, Internet of Things Group, Software and Services, and All Other segments.

The company’s platforms are used in various computing applications comprising notebooks, two-in-one systems, desktops, servers, tablets, smartphones, wireless and wired connectivity products, wearables, retail devices and manufacturing devices, as well as for retail, transportation, industrial, buildings, home use and other market segments.

Last year the company announced an agreement to buy Mobileye, a maker of automotive vision technology used for advanced driver assistance systems (ADAS) and fully autonomous vehicles. The deal sets up Intel as the premier provider of autonomous vehicle chip and machine-vision technology for the ADAS industry, which the company estimates will grow to $70 billion by 2030. Intel’s role in autonomous driving also involves processors that will be embedded in autonomous cars, as well as the computers within vehicles that process data from ADAS systems.

Intel investors are paid a solid 2.45% dividend. The Deutsche Bank price target for the stock is $50. The Wall Street consensus price objective is $46.84. The stock closed trading on Friday at $44.82 a share.

Maxim Integrated Products

This company supplies some chips to Samsung for the red-hot Galaxy line. Maxim Integrated Products Inc. (NASDAQ: MXIM) designs, develops, manufactures and markets various linear and mixed-signal integrated circuits worldwide. The company also provides a range of high-frequency process technologies and capabilities for use in custom designs. It primarily serves automotive, communications and data center, computing, consumer and industrial markets.

Regardless of which processor wins supremacy in the automotive segment over the next couple of years, Maxim stands poised to benefit with its Power Management and SERDES content as autonomous cars require leading power efficiency and data distribution. Moreover, the company should see a linear benefit with additional content needed for greater levels of autonomous-driving features in future generations of automobiles.

Deutsche Bank favors the stock as Maxim continues to generate significant cash and targets 80% payout ratio. The company’s dividend yield is near its five-year average, and the company has grown its dividend in each of the past six years. The favorable view is based on expectations of continued strong growth in automotive with solid double-digit year-over-year growth and continued strength in its industrial segment.

Maxim shareholders are paid a decent 2.55% dividend. Deutsche Bank has a $60 price objective for the shares, and the consensus price target is $54.23. The shares closed on Friday at $56.58 apiece.

MaxLinear

This is a smaller cap player that could provide big upside for investors. MaxLinear Inc. (NYSE: MXL) is a global provider of integrated, radio frequency and mixed-signal integrated circuits and systems on chip (SoCs). The company is a pioneer in multimedia over coax alliance (MoCA) technology, and its products serve broadband communications and infrastructure industries, including cable TV, satellite TV, data center, metro and long-haul optical transport network applications.

The stock is at a discount to peers, and it is another company that could be a very viable takeover candidate. MaxLinears partnership with Celeno Communications, a leading provider of high-performance Wi-Fi silicon and software solutions, and jointly references designs that combine the best in MoCA and Wi-Fi home network technologies to enable whole-home gigabit Wi-Fi.

The $30 Deutsche Bank price target for the shares compares with the consensus target last seen at $31.67. The stock ended last week’s trading at $25.16 a share.

Microsemi

This company could benefit from continued industrial demand and is another Top Pick at SunTrust. 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, 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.

Microsemi employs a unique, mergers and acquisitions–focused business model in the rapidly growing semiconductor space. This business model allows it a valuable balance between growth and diversity. It gives Microsemi the ability to touch all parts of the semiconductor market, allowing for seasonal strength in some markets to offset seasonal weakness in others.

The Deutsche Bank price target was last seen at $63. The posted consensus target is $62.73. Microsemi shares closed Friday at $58.18 apiece.

The Deutsche Bank analysts are avoiding the super high-flying momentum plays and focusing on companies that still have the ability to increase their valuations while staying relevant in the hot new chip areas.