Why You Should Invest in Microcontrollers
Damon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If you are interested in semiconductor stocks but want companies with somewhat less volatile earnings profiles, makers of microcontrollers may be a good choice. Microcontrollers (MCUs) are programmable, embedded "systems-on-a-chip" that are being utilized by an increasing number of industries, from autos and appliances to portable electronics. My basis for believing their profits will be less volatile is a rising adoption of these products by manufacturers across the globe.
Here's a look at where the top MCU producers stand at this juncture. See also my article "Microcontroller Producers to Bounce Back?"
Cypress Semiconductor (NASDAQ: CY) generates about 42% of sales from its programmable-systems division, which consists of programmable devices including for touch, track-pad and automotive applications. Secondly, it operates a memory-products segment, contributing 46% of total sales as of the June quarter. Its data-communications division as well as its emerging technologies and other units deliver 11% and 1% of revenue, respectively.
Notably, a strong turnaround in programmable product sales on a sequential basis (from March through June) occurred, allowing for an $0.11 upturn in share earnings quarter-to-quarter, to $0.14. Sales growth was driven by its TrueTouch touchscreen controllers, and is indicative of the resiliency of the product category.
Cypress lists among its key strategies the driving of programmability through ongoing proprietary product development, as well as encouraging the incorporation of those offerings in items like cellphones, tablets and e-readers. In addition, it is looking to exit under-performing businesses, clearly a sign that it believes in the endurance of MCUs.
I like Cypress shares in light of the company's R&D (25% of sales) investments, and its cost-containment measures. At a forward P/E of 13.9, it is a solid near- or long-term investment at this juncture. The yield of 3.5% is above average, too.
MCUs fueling growth
Freescale Semiconductor's (NYSE: FSL) automotive MCU (about 26% of total sales), microcontrollers (19%), and digital-networking (22%) units are contributing to revenue growth. Its remaining divisions--Analog and sensor, RF and "other"--comprise the balance of sales.
Catalysts behind Freescale Semiconductor's revenue and income gains are both economic, including rising vehicle production, and related to the aforementioned increase in adoption of microcontrollers, such as for use in next-generation wireless networks.
The company spends less on R&D, at about 18%, which is partially the reason for a higher operating (EBITDA) margin. On that note, its earnings are apt to soar in the near term, as it capitalizes on favorable operating conditions.
Thus, Freescale shares are a good price-momentum holding at this time. Its forward P/E ratio is 9.7.
Advanced microcontroller applications
Atmel (NASDAQ: ATML) made a name for itself with touch-sensing microcontroller applications. Currently, it is undergoing a slow rebound in results through growth in sales of those products. In particular, it's offerings for enhanced, low-power, computing performance and for larger/lighter portable products are being received well.
The company spends about 19% of sales on R&D. Its operating margin is lower than that of Freescale, but better than Cypress'.
What separates Atmel from the first two companies as an investment is its sizable proportion of microcontrollers in its product mix, and the high-growth markets it serves. MCUs contributed 62% of 2012 sales, while ASIC (Application Specific Integrated Circuits) delivered 14%, RF and automotive 12%, and non-volatile memories 12%.
The shares are appealing for near-term upside, and, given the company's un-leveraged balance sheet, it should have the leeway to invest in long-term projects that will support appreciation over the three- to five-year haul.
Market leader poised for recovery
Microchip Technology (NASDAQ: MCHP) attributes 65% of June-quarter sales to its microcontroller business. Analog, interface, and mixed-signal offerings comprised another 22%. Memory (7%) and technology licensing (5%), along with "other" (1%), round out the balance.
Last August's acquisition of SMSC allowed for a 25% increase in June-quarter microcontroller sales. End-markets providing the bulk of the growth have been housing, industrial, and automotive.
Microchip generates the highest EBITDA margin of all the companies discussed here. Its R&D expenditures are around 16% of sales. Still, it is likely to at least maintain its market share, thanks partly to the recognition of its PIC brand.
The shares, trading at a forward P/E of about 14.9, have near- and long-term total-return potential that exceeds market averages. Its steadily increasing dividend is an added benefit, and the shares yield a healthy 3.5% at this juncture.
Where to make commitments
I recommend Cypress, Atmel, and Microchip for momentum, or long-term, portfolios. Their product lines differ somewhat, as do their core customer markets, and investors ought to decide accordingly. Freescale is also likely to perform well in the near term should the market environment persist.
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Damon Churchwell has no position in any stocks mentioned. The Motley Fool recommends Cypress Semiconductor . 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!