Semiconductor Stocks Ready to Bounce
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Semiconductor companies typically are highly profitable behind solid product margins, while also tending toward volatility stemming from uneven demand trends. A well-timed investment can result in strong price appreciation for those willing to endure bumps along the road. There are certainly some opportunities at this time within the industry, based on several beliefs, including that the telecom networking and mobile device (smartphone) markets are poised for growth.
Part of the basis for these recommendations is the general upturn in telecom-related spending. Moreover, results posted by Semtech Corp. (NASDAQ: SMTC) were promising. It reported record quarterly sales, partly thanks to the acquisition of Gennum, but also owing to rising demand for smartphone applications. Share earnings were $0.22, skyrocketing from the prior-year tally of $0.03. Indeed, the Communications and High-end Consumer markets led the way, posting around 20% year-over-year revenue gains combined.
My thesis is that the upward trends will have positive impacts on numerous other industry stocks; here are a few I have in mind:
Maxim Integrated Products (NASDAQ: MXIM)
At an $8 billion market cap, Maxim is a major player in Semtech's core end markets, namely computing, communications, and industrial. Last year was a down year for most product categories, but management is optimistic and prospects are better for 2013.
The release by its largest customer, Samsung, of the Galaxy S4 should help to boost June-quarter earnings, thanks to the inclusion of several Maxim chips. Second, industrial segment profits are set to climb on an upturn in automotive-related sales. On that note, auto suppliers are, for the most part, positioned to fare well this year. Third, Maxim's networking and data communication revenues are on track to increase, in line with momentum in the broader telecom equipment industry. These factors, along with progress in the medical sector, should combine for healthy near-term results.
Maxim's gross margins are substantial, in the low-60% range, and are apt to remain at that level for now. Barring any setbacks in terms of the outlook (June-period share net is targeted at $0.42 to $0.46 versus last year's $0.41), I expect Maxim shares to recover from their recent pullback.
Given the positive outlook, there are a couple of smaller, less visible, manufacturers that could be set for stock price upside such as Spectrum.
Spreadtrum (NASDAQ: SPRD) is more narrowly focused, particularly in the mobile phone market, developing chip-set platforms for products incorporating 2G, 3G, and 4G technologies. Consequently, its shares are more prone to volatility and demand fluctuations. Nevertheless, their appreciation potential is enticing in light of current conditions and the stock's subdued quotation.
Revenue for the June quarter is pegged between $220 million and $228 million, representing a massive advance from the 2012 figure of about $171 million. Accordingly, profit may well rise considerably to about $0.50, from $0.41. The company is well-situated with its smartphone product lines, and should benefit from an expanding Chinese market, such as with China Mobile, as it is officially based in Shanghai. Because of this, Spreadtrum is geographically-positioned to benefit from high-growth prospects in that region, where demand for advanced wireless services is apt to climb substantially. Of note, wireless data traffic and voice usage climbed sharply at China Mobile in 2012.
Spreadtrum is in line for a robust earnings gain this year, should positive trends persist. It plans to continue to spend more on research, though it should now be at a reduced percentage of sales. Tablet applications may be one target of product development spending. The shares should be considered for their price upside and 2% dividend yield.
MagnaChip Semiconductor Corp.
MagnaChip(NYSE: MX) is also foreign-based, this time in Luxembourg, and it has production sites in Korea. Still, MagnaChip has consistently performed above expectations.
The company, like Semtech, is an analog and mixed-signal semiconductor maker, though it operates at significantly lower gross profitability. It, too, is guiding for considerable top-line gains in the June quarter. Its largest business segment, Semiconductor Manufacturing Services, is growing nicely. MagnaChip also sells into the display solutions market, such as mobile LCD screens, and the power solutions sector. Furthermore, I like that two of its primary product development markets are green energy and automotive, where semiconductor adoption is apt to increase.
MagnaChip shares have gained ground, more than doubling since bottoming last July, and up 18% just this year. Still, as another company at the forefront of the smartphone market, where it is diverting resources, it may well have above-average capital gains potential.
Semiconductor companies are highlighted by companies jostling for position in high-growth product markets such as mobile computing, often to mitigate sluggishness in antiquated businesses, like traditional computing. Their proprietary product designs can net wide product margins. Accordingly, the shares of these companies can offer significant price gains. Pitfalls of the industry, such as inventory gluts and reduced capacity utilization can spur selloffs. The best companies to look for are those with top-notch customer contingencies and leading-edge development pipelines. Of those discussed above, at this juncture, I like Maxim the most, followed by Spreadtrum and MagnaChip.
Damon Churchwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!