The Semiconductor Industry is Sinking

Babulal is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When I was preparing for my CFA exam my “BA II Plus” Texas Instruments was of great help to me. The Texas Instruments (NASDAQ: TXN) financial calculator was a boon for me then, but unfortunately I cannot say the same about the semiconductor industry as a whole. There have been signs of improvement in telecom infrastructure, but the consumer electronics and auto build rates are still slow thanks to concerns about fiscal worries adding to the troubles.

The recent fourth quarter earnings release of Analog Devices (NASDAQ: ADI), a global leader in high-performance semiconductors for signal processing applications, also did not have much for semiconductor investors to be happy about. The recent quarter's net income declined by 2.4% and was reported at $179.2 million compared to the same quarter last year. Revenue for the current quarter also fell by 3%. The revenue has fallen in the last four consecutive quarters, and net income has declined in the last five consecutive quarters.

Facts and Sentiments

The overall demand for the company’s products has declined, as evidenced by the way distributors are shrinking their inventory levels. The company has also reduced its production in the current quarter and will reduce it further in the coming fiscal year. The current strategy should provide Analog with operating leverage when the market rebounds; but keeping the European worries and the U.S. fiscal cliff in mind, the recovery seems to be distant.

Patient investors still believe Analog’s margins can significantly improve once the demand recovers, which should better the company’s profits and cash flows. Fundamentally speaking, Analog’s performance (measured through the company’s ROA and ROI) has been directly impacted by its stock price in the past. Improved firm performance in 2008 boosted the stock price by 18%. By the end of 2008 and in 2009 the stock price fell by 15% when ROE dropped from the low 30’s to about 10%, while ROA fell from just above 25% to about 8%. Analog’s current performance for the last one and a half years is on a decline, but the share price is increasing. If history is to be believed the stock prices should fall in the near term.

Texas Instrument Seems To Be the Right Pick

As a whole the semiconductor industry does not seem too healthy, but Texas Instruments may be a decent pick. The company’s revenue has fallen, but at a lower rate than the industry average of 4%. The company has also beaten the industry average of net profit margin, which is currently 23.5%.

A moderately strong balance sheet supports the company’s above average performance. The company has a good cash flow and pays decent dividends, and keeps increasing its payout every year. The company uses its cash to make strategic buybacks and acquisitions to further improve its EPS.

The company’s performance is good, and should get better with a rebound in the economy and semiconductor industry. The company has a library of products with a long product life cycle, giving it an edge in the market, and thus making this multi-billion company a good buy for long term investors at its current prices.

A Dig into NFC’s Possibilities

NXP Semiconductors NV (NASDAQ: NXPI) is a competitor to both Texas Instruments and Analog, and is a primary maker of near-field communications (NFC) chips. NXP has managed to meet expectations in this bad economy, and its share prices have a whole lot of upside potential if its NFC technology gets proper recognition. Next year is expected to be a big year for NFC technology, as sales of NFC-equipped cell phones are expected to reach 100 million. NXP's NFC technology helps in facilitating payment systems by simply swiping your phone near a checkout register, which is supplied by Google Wallet enabled devices such as Samsung Galaxy S III. NXP does have competitors, but it can still tap 50% of the market,which should help its stock price rise. I recommend a strong buy for this stock.

BabulalBachhawat has no positions in the stocks mentioned above. The Motley Fool owns shares of NXP Semiconductors. Motley Fool newsletter services recommend NXP Semiconductors . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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