3 Tech Stocks To Consider, 2 To Avoid

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

Advanced Micro Devices (NYSE: AMD) dropped 12% after the announcement that current CFO Thomas Seifert will be leaving the company. Seifert had only been with the company for three years, but in the wake of recent upper management turmoil and a drop in sales he had become a reliable asset. If nothing else, he had the longest tenure of any C-level executive at the company. Investors had seen time and time again that he could keep Advanced Micro Devices' head above water in times of financial crisis.

While all PC makers and PC component makers are feeling the blow from the rise in popularity of tablets and smart phones, analysts say that Advanced Micro Devices suffers internal execution problems as well. In July, the board had to take dramatic measures after underperforming in both the Chinese and European markets.

Seifert had been chosen as the temporary CEO after the removal of Dirk Meyer from the position. Meyer was reportedly pushed out after the company failed to successfully integrate into the growing mobile and smartphone market. The new CEO, Rory Read's arrival has confirmed Seifert's decision to leave and was followed by the resignation of several respected engineers and senior executives. Those close to Seifert within the company cited that one of his reasons for leaving was to seek a permanent position as a CEO.

Reconciling Valuation

A review of Advanced Micro Devices' peers reveals that it is cheap, and that investors should take heart because the drama of a management change and its ongoing issues are already priced into the stock.

The best investment among these candidates is Advanced Micro Devices which recently traded at $3.40 per share. The shareholders of this semiconductor have suffered a 37.6% drop in price over the past year. When compared to the 1.29 price-to-sales ratio of the S&P 500; the 0.37 ratio of this stock is very attractive. AMD shares are trading at an incalculable price-to-earnings ratio (there was net loss for the last twelve months). Shares trade at a 2.15 price-to-book ratio which is near the 2.05 S&P 500 average. Investors should consider this number somewhat inflated because the price-to-book ratio fails to account for internally-developed intellectual property including patents, brands, and trademarks. If the economic value of these assets were even partially recorded on the balance sheet, the firm's price-to-book ratio would be lower. Analysts expect that the firm's earnings growth will accelerate with five-year estimates at 6.6% per year, considerably faster than -22.8% annualized earnings growth over the past five years.

It is not the only attractively-valued semiconductor manufacturer. Intel (NASDAQ: INTC), recently traded near $23 per share after a 4.3% decline in price over the past year. Intel shares are valued at a compelling 9.6 price-to-earnings ratio, a value which is significantly lower than the 14.1 average of the S&P 500. Shares also trade at a 2.33 price-to-book ratio which is near the 2.05 S&P 500 average. As previously stated, investors should consider this number cheap because the price-to-book ratio fails to account for internally-developed intellectual property including patents, brands, and trademarks. If the economic value of these assets were even partially recorded on the balance sheet the firm's price-to-book ratio would be much lower. Intel's 2.08 price-to-sales ratio is in line with today's prevailing market multiples and does not disconfirm how attractive it is.

Intel is also attractive because of its strong balance sheet and commitment to shareholder income. The firm's easily manageable 0.15 debt-to-equity ratio demonstrates that the firm is not overleveraged. This stock pays a hefty 3.97% dividend which is more than twice the 1.64% 10-year treasury yield. Future dividend payments are likely because the company pays out 0.34 of earnings as dividends, so earnings could drop considerably before dividends must be cut.

In contrast, Maxim Integrated Products (NASDAQ: MXIM) stock is too expensive at roughly $26.60, a price level which seems impossible to justify. Investors can buy more revenues per dollar from the S&P 500 since this index has a price-to-sales ratio of 1.29 while this stock has a much higher 3.23 ratio. Maxim shares currently trade at a high 22.56 price-to-earnings ratio, a higher value than the S&P 500 index. Income investors should not be lured by the firm's dividend yield. Sure, this stock pays a hefty 3.61% dividend which is more than twice the 1.64% 10-year treasury yield. However, the firm's 0.72 dividend payout ratio is shaky since this leaves very little room for failure and scarce funds for reinvestment.

ON Semiconductor (NASDAQ: ONNN) stock is a risky turn-around story. It trades at roughly $6 per share, an attractive price reached after this mid-cap stock has suffered a 20% drop in price over the past year. This price drop has sweetened valuations. At a value of 0.89, this stock trades at a fraction of the S&P’s price-to-sales average multiple. Shares trade at a 1.85 price-to-book ratio which is near the 2.05 S&P500 average. As a tech company, investors should consider this value because it misses the economic value of many intangible assets. These low valuations are attractive in light of how analysts expect that the firm's annualized earnings growth will be 12.3% over the next five-years.

The present, however, does not look so bright for ON Semiconductor. On Semiconductor shares are trading at an incalculable price-to-earnings ratio (there was net loss for the last twelve months). Also, the firm has a 0.71 debt-to-equity ratio that is higher than its peers.

Compared to these peers, Texas Instruments (NASDAQ: TXN) stock is too expensive at roughly $28; a price level which seems impossible to justify. Investors can buy more revenues per dollar from the S&P 500 since this index has a price-to-sales ratio of 1.29, while this stock has a much higher 2.35 ratio. Texas Instruments shares currently trade at a high 20.11 price-to-earnings ratio, a higher value than the S&P 500 index. The 2.81 price-to-book multiple of this stock is higher than the S&P 500 price-to-book ratio. The firm's 0.42 debt-to-equity ratio is higher than the ratios of Intel and Advanced Micro Devices.

Conclusion

Advanced Micro Devices stock is attractively priced, and its low valuations more than compensate for the loss of its CFO. However, Intel offers valuations which are nearly as attractive for much less risk. For this reason, Intel is a better buy. Advanced Micro Devices and ON Semiconductor stock are investable as turnaround stories, but should be considered more speculative.

Dig Deeper

When it comes to dominating markets, it doesn't get much better than Intel's position in the PC microprocessor arena. However, that market is maturing, and Intel finds itself in a precarious situation longer term if it doesn't find new avenues for growth. In this premium research report on Intel, our analyst runs through all of the key topics investors have understand with the chip giant. Better yet, you'll continue to receive updates as news develops for an entire year. Click here now to learn more.

 


BillEdson11 has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel. Motley Fool newsletter services recommend Intel. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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