2 Stocks To $35 - Offering 15% Gains In Q1 2013

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

The popularity of mobile devices from Apple (NASDAQ: AAPL), Google and Samsung have long made semiconductors a target for those who love derivative plays. However, aside from a few 2012 standouts such as Skyworks and OmniVision gaining 22 and 13% respectively, investors have learned that playing the chip angle has not exactly worked. But this may not be the case for too long.

Expectations for a 2013 recovery seems broad among those with close ties to the industry. Not only are mobile devices expected to continue their ascent in terms of consumer demand, analysts also project better growth in telecom equipment and in the industrial end-markets. Likewise, if PCs actually see a boost in sales due to any traction gained by Windows 8, the second half of 2013 just might present quite a few surprises. With that in mind, here are a couple of names to consider.

Texas Instruments (NASDAQ:TXN) – Price Target $35

Leading the way is Texas Instruments, a stock that I have always wanted to like but just couldn’t. Aside from the fact that the company has been affected by a tough macro climate, two of its biggest customers (Nokia and Research In Motion) have been the two biggest laggards in a growing mobile market. The company could get no breaks.

The good news is Texa Instruments has figured out ways to beat expectations. Unfortunately, Wall Street has not cared. In its most recent quarter, the company posted net income of $784 million, or 67 cents per share on revenues of $3.39 billion – beating EPS estimates of 39 cents, while also topping revenue projections by $4 million.

That was good. But revenues declined 2% year-over-year, the fourth straight quarter of deteriorating growth. Consequently, the stock has been stuck in quicksand. But the company’s solid market position presents good value. In 2013, management must figure out ways to harvest that potential. It can start by securing more business to reverse its revenue slide. It seems this is what the company has already begun to do by recent increases in R&D spending.

As rivals such as Qualcomm and Nvidia are ramping up their product portfolios and positioning themselves for a market recovery, the company’s main challenge is to undo the trend of fallen orders and high inventories. Also, if Texas Instruments can continue improving its margins and operating income, which arrived 40% better sequentially and 3% YOY in the recent quarter, the company has a chance to open some eyes in 2013. As a result, I see a 15% premium above current value. The stock should see $35 in short order.

Avago Technologies (NASDAQ: AVGO) – Price Target $35

Avago hasn’t been the same since reaching a 52-week high of $39.22 several months ago. The stock has made new lows ever since – dropping over 20%. The company has had a hard time convincing investors that it can grow outside of its two biggest customers in Apple and Samsung. Unfortunlately, its most recent quarter only highlighted the struggles.

Avago had a “mixed” end of the year.  Disappointingly, revenue dropped 1% year-over-year. But on the other hand it was a 2% sequential improvement. Likewise, the company's wireless segment soared 30% - helped by strong mobile demand. But that was not enough to offset weakness in other categories such as its wired business, which posted an 8% revenue drop due to weak carrier spending.

As well, issues with profitability have caused more pessimism among investors - albeit more than is deserved. But Avago can’t post 40 basis point drops in gross margin as it did in the quarter and expect to win favors. Remarkably, operating income still grew by almost 10% and the company made roughly a 2 point improvement in operating margin. This fact makes me like the company’s prospect for 2013.

However, the biggest catalyst will be that in Samsung and Apple, Avago has over 50% exposure to the mobile market, which has yet to peak. Also working in the company's favor is that Apple has recently topped Google in device sales – exceeding 50% market share. With Apple projecting revenues of $52 billion in the January quarter, this now seems very conservative given that iPhones represent well over 50% of Apple’s fiscal Q1 revenues.

Avago is certain to benefit from any momentum created by Apple. What’s more, management seems to understand what needs to happen to turn the company’s fortunes around. Moreover, investors should expect a rebound in Avago’s industrial/auto segment, which saw revenue plummet during the quarter by 11%. The stock is worth a gamble here with a near-term price target of $35 – representing a 15% gain above current value.

Bottom Line

Both Texas Instruments and Avago are trading below their long term value. Although they are far from sure things, their market positions offer very limited downside risk. 15% may not seem that impressive, but relative to the sector’s performance in 2012, which was 5%, these two are expected to outperform. It’s going to require some patience, but these two won’t disappoint when that inevitable industry rebound emerges.

rsaintvilus has a long position in Apple. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. 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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