A Solid Semiconductor Stock for Your Portfolio

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

Maker of programmable chips Xilinx (NASDAQ: XLNX) is up around 7% this year. While this year-to-date appreciation might not seem very handsome at first, Xilinx has a lot of potential to continue its steady progress going forward. The stock isn’t fashionable by any means, but it has the potential of providing stable returns driven by its diversified business.

Improvement all around

Its business has gradually improved, and Xilinx is not going to slow down any time soon as its end markets are getting better. Xilinx’s latest quarterly report tells us that the company recorded sequential gains in revenue, which grew 4% to $532 million on the back of an improvements in its Industrial, aerospace & defense and broadcast, consumer & automotive businesses.

Xilinx also trumped consensus estimates on the bottom line, posting adjusted earnings of $0.47 a share, up 24% on a sequential basis and ahead of the $0.45 estimate (according to Yahoo! Finance). More importantly, the company witnessed sales of its new products increase 86% from the year ago period, and they now account for 27% of total revenue. The solid growth in these new products is simply fantastic as they have helped Xilinx gain market share and also report better gross margin.

A number of catalysts

The company is relying on its new products to drive revenue in its communications and data center business. Xilinx states that the roll out of TD-LTE in China will provide a boost to its business in the second half of the year. Xilinx would probably begin ramping up production for TD-LTE chips in the second half of the year.

The company seems to have already landed design wins for TD-LTE infrastructure in the country and is waiting for actual deployment once its customers finish testing the equipment. For instance, China Mobile (NYSE: CHL) started its TD-LTE trials in Guangzhou and Shenzen earlier this year, and the carrier is aiming for an August roll out of 4G services.

China Mobile is expected to start releasing 4G-compatible devices later this year. Linking up the dots, China Mobile might be Xilinx’s customer, and if this is the case, it would be a huge advantage for the company, helping it gain a foothold in the vast Chinese cellular market with the help of the world’s largest mobile operator.

Xilinx’s industry leading 28-nanometer chip portfolio has been performing above expectations and the company has now readied a 20-nanometer solution. Moreover, Xilinx projects that sales of 28-nm chips will exceed $250 million in the current fiscal year, while the 20-nm chips would be tested by customers.

Also, Xilinx is trying its hand in data centers. This is a smart move, and although Xilinx doesn’t derive a major portion of its revenue from data centers yet, it has landed a few design wins which should fuel growth in the future. According to Cisco’s (NASDAQ: CSCO) Global Cloud Index report, global data center traffic will quadruple in the next five years. As the world moves to the cloud, construction of data centers and a relationship with Cisco would aid Xilinx.

In a rapidly growing cloud environment, presence of a major client such as Cisco is one of the best things that can happen. According to Canalys, the global data center infrastructure market is expected to be worth around $152 billion by 2016 and Cisco would be at the forefront. The networking giant has made consistent advances to fortify its position in cloud computing. It recently acquired SolveDirect, an Austrian company that provides cloud software and services after a series of different acquisitions earlier.

Thus, it won’t be surprising if Xilinx rides Cisco to data center glory going forward. Also, as I’d mentioned earlier, improving trends in Xilinx’s industrial, aerospace & defense are another positive, as the company expects revenue from this segment to rise in the current quarter. Same goes for the broadcast, consumer & automotive business.

The bottom line

Improving economic trends, growth in the communications business, and rapid adoption of new products are expected to be the drivers behind Xilinx’s business. Innovation is one of the primary reasons why investors should like the company apart from the expected growth in earnings. While its trailing P/E looks a bit expensive at 21 times, a forward P/E of 17 suggests that there’s growth ahead. Moreover, a dividend yield of 2.7% is another incentive which might attract you towards this stock.

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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. The Motley Fool owns shares of China Mobile. 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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