1 Semiconductor to Buy, 1 to NOT Buy
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
While the industry has been mired with supply chain disruptions (many of which were through uncontrollable weather), semiconductors still can have good fundamentals. They offer a great way to diversify in technology and have taken steps in recent years to hedge against macro uncertainty. Even still, some stocks are overvalued, others are speculative, and still others are undervalued.
Marvell (NASDAQ: MRVL) is now one of my favorite risky stocks on the Street. It is only slightly more than three-quarters of what it was worth 12 months ago and 62% of the 52-week high. At a respective 13.6x and 9.4x past and forward earnings with a dividend yield of 2.3% and a $14.03 price target, Marvell is a compelling "buy."
Some doubt the firm because of volatile operational trends. Free cash flow for the TTM ending 2Q12 was $643 million versus nearly $1 billion in 2Q11 and 2Q10. Is it worth jumping into the middle of this roller coast ride?
Yes! Volatility may be the name of the game for Marvell, but results have been otherwise strong. There was a 13.6% miss in the 2Q, but the preceding quarters were 12.5% and 33.3% better than expected. Semiconductors, in general, are volatile, but the secular trends are still strong. With a clean balance sheet absent of long-term debt and high liquidity with a quick ratio of 4.1x, Marvell is prepared for a substantial growth curve investors have failed to appreciate. In fact, during the past 5 years, EPS grew annually by 24.9%. That period covered the worst economic crisis since the Great Depression. Now, analysts are still expecting double-digit growth but around half of what was achieved during the challenging economic time period.
If you are looking for much safer stocks, I recommend household names Intel (NASDAQ: INTC) and Broadcom (NASDAQ: BRCM). Both firms trade at exceptionally low multiples, and the former even offers a dividend yield of 3.9%. These two producers are valued below historical multiples despite excellent performance and optimistic "buy" ratings on the Street. I recommend buying shares in these safe producers while diversifying a bit into risky ones, like Marvell.
Taiwan Semiconductor (NYSE: TSM), on the other hand, appears too expensive to swallow the uncertainty. It trades at a respective 16.3x and 13.6x past and forward earnings with a dividend yield of 3.4%. Although this income is generous, analysts are still rating the stock closer to a "sell" than a "buy" for a reason.
In addition to much lower liquidity than Marvell (the current ratio for TSM is at 1.2x, management is guiding for production cuts. This will become particularly pronounced early 2013 as inventories shift towards new products. Although TSM has done well penetrating the mobile market, the upside has already been well factored into the stock price. Investments in microcontrollers and analog management have clearly paid off with meaningful market share growth.
But where Marvell has been a roller coaster up the hill, Taiwan Semiconductor has been a roller coaster down the hill. FCF for the TTM ending 2Q12 was $2.3 billion versus $4.2 billion in 2Q08. Accordingly, I recommend holding off until multiples compress.
TakeoverAnalyst 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.