Merrill Lynch’s 4 Top Semiconductor Stocks to Buy

By Lee Jackson Published Dec 4, 9:00AM EST

Follow 24/7 Wall St. on Google

This post may contain links from our sponsors and affiliates, and Flywheel Publishing may receive compensation for actions taken through them.

Despite an almost 30% move in the SOX index this year, which tracks the semiconductor industry, the analysts at Merrill Lynch are advising clients that they should stay long the chip stocks as we move into 2015. They make the case that the old highly cyclical model of the chips is starting to die, and they also submit that chip demand is now more seasonal than cyclical. In a new report they lay out the case for more gains for the sector.

The Merrill Lynch analysts point to a comment by Texas Instruments CEO Rich Templeton, in which he basically said that since we haven’t experienced a super-strong economy, and haven’t seen an over-inflated chip market, there is really no reason we should expect a big chip market crash. With all the industry’s metrics pretty well balanced, 2015 could be another strong year.

We screened the Merrill Lynch research data base for some chip stocks rated Buy at the firm.

Analog Devices Inc. (NASDAQ: ADI) is a stock rated Buy at Merrill Lynch and the analysts are very positive on the prospects for growth in communications driven by wireless base stations and TD deployments in China. They also see recovery in the industrial sector and growth in the automobile markets over the next year, both of which would benefit Analog Devices.

Analog Devices investors are treated to a very competitive 2.7% dividend. Merrill Lynch has a $64 price target for the stock. The Thomson/First Call consensus price target is $56.37. The stock closed Wednesday at $56.51.

ALSO READ: What Apple’s New Street-High Price Target of $150 Really Means

Altera Corp. (NASDAQ: ALTR) delivered solid numbers so far this year, beating consensus revenue and earnings estimates. The company is among the leaders in China, and recent data show that is not changing anytime soon. 4G network deployment-related orders from Huawei have surged since earlier this year, and Huawei remains a 10% customer of Altera. The multiyear growth trend in China wireless infrastructure deployments should act as a driver for Altera in years to come, with LTE-related capital expenditures expected to increase exponentially in the next two years.

Altera investors receive a 1.9% dividend. The Merrill Lynch price target is $38, and the consensus is lower at $37.14. The stock closed Wednesday at $37.63.

Broadcom Corp. (NASDAQ: BRCM) is a top supplier to both Samsung and Apple, and the new year could bring even more earnings growth for the chip giant. Some Wall Street analysts feel that the company, which is hosting an analyst day on December 9, will discuss in greater detail the new equity compensation program for management, which will be driven in large part by total shareholder return. This is one of the reasons to believe the upcoming analyst day will be particularly shareholder friendly.

Broadcom shareholders are paid a 1.1% dividend. The Merrill Lynch price objective is $50, and the consensus estimate is $44.52. The stock closed on Wednesday at $43.25.

Intel Corp.‘s (NASDAQ: INTC) commitment to smartphone and mobile applications, combined with the resurgence of PC growth this year, has made Intel one of the best large-cap value stocks to buy in 2014, and the same outlook can drive the stock next year. Intel trades at 15 times forward earnings, more than in recent years, but still a reasonable multiple for investors looking for growth. The Merrill Lynch team cited lower beta, a very fair dividend yield and operating leverage, as good reasons to invest in this chip giant.

Intel shareholders are paid a solid 2.4% dividend. Merrill Lynch has a $43 price target, while the consensus target is posted at $35.61. Intel closed Wednesday at $37.43.

ALSO READ: What Could Make IBM the Best Dow Stock of 2015

The Merrill Lynch report also speculated that consolidation in the industry, which has been well received on Wall Street this year, could continue. Most likely these large cap companies would be the acquirers. We will be on the lookout at 24/7 Wall St. for the companies likely to be potential targets.

About the Author Lee Jackson →

Lee Jackson has covered Wall Street analysts' equity and debt research and equity strategy daily for 24/7 Wall St. since 2012. His broad and diverse career, which included a stint as the creative services director at the NBC affiliate in Austin, Texas, gives him unique insight into the financial industry and world.

Lee Jackson's journey in the financial industry spans over 30 years, with nearly two decades as an institutional equity salesperson at Bear Stearns, Lehman Brothers, and Morgan Stanley. His career was marked by his presence on the sell side during pivotal Wall Street events, from the dot.com rise and bubble to the Long Term Capital Management debacle, 9/11, and the Great Recession of 2008. This is a testament to his resilience and adaptability in the face of market volatility.

Lee Jackson’s practical financial industry experience, acquired from a career at some of the biggest banks and brokerage firms, is complemented by a lifetime of writing on various platforms. This unique combination allows him to shed light on the intricacies and workings of Wall Street in a way that only someone with deep insider experience and knowledge can. Moreover, his extensive network across Wall Street continues to provide direct access for him and 24/7 Wall St., a privilege few firms enjoy.

Since 2012, Jackson’s work for 24/7 Wall St. has been featured in Barron’s, Yahoo Finance, MarketWatch, Business Insider, TradingView, Real Money, The Street, Seeking Alpha, Benzinga, and other media outlets. He attended the prestigious Cranbrook Schools in Bloomfield Hills, Michigan, and has a degree in broadcasting from the Specs Howard School of Media Arts.