2 Semiconductor Stocks to Consider Buying

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

Investors are encouraged to back the supplier of tech markets, semiconductors, if they are bullish on the sector as a whole. In my view, however, there is a wide variance of risk/reward profiles on the street.

Texas Instruments (NASDAQ:TXN): The Good And The Bad

As one of the flagship semiconductor producers, TI is a good indicator of the health of the tech sector. For the year to date the stock is down 8.7%. It now trades at a respective 20.3x and 13.9x past and forward earnings, with a dividend yield of 3% and a beta of 1.1. Analysts forecast the company to grow EPS by 10% annually over the next 5 years - just enough to cover the normalized weighted average cost of capital.

However, investors should be aware that the company appears to be positioning itself away from mobile and into higher margin (but slower long-term growth) embedded chips. While I am optimistic about the company's restructuring that joins the wireless and embedded unit together, I am concerned about the business it is soliciting. Within tablets, TI is speculated to target Amazon given the presence of ARM-based OMAP processors in the Kindle Fire. Amazon, in my view, is exposed to considerably more competition than what I believe the market appreciates. As its technology is undermined, TI may be in for a surprise if it thought it could count Amazon as a sustainable stream of free cash flow.

It should, however, be noted that TI has a history of exceeding expectations. In all of the last 5 quarters, management beat consensus estimates, and did so by an average of 7.8%.

Analog Devices (NASDAQ: ADI): Risky, But A Takeover Play

Analog Devices is quite a risky stock relative to TI. It trades at a respective 18x and 15.4x past and forward earnings, with a dividend yield of 3.1%. Analysts forecast 11.6% annual EPS growth over the next 5 years, and, as strong as this is, it is not enough to justify the current valuation.

Assuming Analog meets expectations, 2016 EPS would come out to $3.47. At a multiple of 16x, this translates to a future stock value of $55.52. Discounting backwards by 10% yields a present value of $34.47, which indicates that the company is slightly overvalued right now. With a  8.4 quick ratio and a debt-to-equity ratio of 0.2, the company may be a takeover target--but I wouldn't hold my breath.

As one Motley Fool writer noted, the industry is moving towards consolidation following the buyout of National Semiconductor by TI. In my view, a suitor could come a long and scoop up Analog in an effort to keep up in scale with TI's incredible organic growth rate.

Or perhaps Analog may be the suitor, and not the target. Maxim Integrated Products (NASDAQ: MXIM) would be an ideal buyout, given its high earnings growth curve ahead and sustainability through design wins with leading producers like Samsung. Maxim has notably been attempting to generate cash through litigating competitors for breaching Maxim's patent rights. If it could diversify beyond the core business, it would mitigate risk and encourage investors. By taking over Maxim, Analog could do just that and create value.

TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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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