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Chip Makers Display Undeniable Strength: 4 Solid Buys

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U.S. chip equipment makers have been gaining on superb growth in sales, earnings and cash flow for quite some time. In fact, a business-friendly tax cut policy signed by President Trump encouraged market pundits to upgrade sales and earnings estimates for U.S. semiconductor companies this year. Such a policy will make them more competitive with their global counterparts. 

The makers of computer chips, utilized in everything from smartphones to self-driving cars, have doubled since the summer of 2016 and have outpaced the broader market by a wide margin. After all, sales were boosted by an ever-increasing number of devices that are connected to the Internet. With escalating demand for personal computers and data centers, chips are required more than ever.

The semiconductor-equipment group, semiconductor-manufacturing group as well as the computer-data storage group that includes some chip stocks rose 9.8%, 5.4% and 9% last week, respectively. Given such bullishness, investing in some solid semiconductors stocks having further upside potential won’t be a bad proposition.

Biggest Tax Overhaul Boosts Semiconductors

The House of Representatives approved the biggest overhaul of the U.S. tax code in 30 years, which mostly supported gains among the manufacturers of internal technologies, the semiconductor makers.

As per Statista, corporate taxation rate in the United States was among the world’s highest. This explains why most of the semiconductor majors stashed a lion’s share of their earnings overseas. QUALCOMM Incorporated (QCOM - Free Report) used a large portion of its $30-billion overseas cash to acquire Netherlands-based NXP Semiconductors (NXPI - Free Report) , while Intel Corporation (INTC - Free Report) used its foreign cash to buy Israel-based Mobileye.

But, the headline-grabbing move of the bill was slashing the corporate tax rate from 35% to 21% and that the companies will be paying between 8% and 15.5% instead of the earlier 35% to bring back money from overseas. This in turn will make semiconductors repatriate trillions of dollars held abroad and eventually drive their after-tax earnings. Chip makers can also use this extra cash for research and development, and mergers & acquisition activities (read more: GOP Passes Landmark Tax Bill: Best & Worst for Stocks). 

With Trump’s tax reform having a positive impact on the broader U.S. semiconductor industry, we have highlighted four top chip stocks that are on the move right now. These stocks also flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Micron Trends Upward

Micron Technology, Inc.’s (MU - Free Report) shares jumped 8.8% on Mar 12 and broke out of a 14-week consolidation period. The stock crossed the $50 mark for the first time since Sep 28, 2000, while a volume of around 57.7 million shares was more than enough to make it the most actively-traded stock on the Nasdaq. Micron has risen 27% over the past three months.

Higher dynamic random-access memory (DRAM) chip pricing, margin increase in Nand chips and expected rise in capital returns were cited to be the major catalysts behind this upward journey. Strong demand for high-end mobile and data center products should also bode well for the provider of semiconductor systems worldwide.

Micron’s sales per share soared 47% to $17.61 in fiscal 2017 from $11.97 in fiscal 2016. Earnings per share improved $4.45 from a net loss of 22 cents in the previous year. The Zacks Consensus Estimate for its current-year earnings increased 7.5% in the last 60 days. The stock’s expected earnings growth rate for the current quarter and year are a whopping 206.7% and 113.1%, respectively. The company has a Zacks Rank #2 (Buy).

Data Business to Propel Intel Higher

The world’s largest chip maker, Intel, will certainly benefit from its exposure to big growth markets and strength in investors’ sentiment. But, it’s focus on data-centric business is likely to drive growth in the near future. Emergence of Internet of Things (IoT) and smart devices is mostly driving demand for Intel’s products. This has led to Intel’s data business jump of more than 20% on a year-over-year basis.

Intel has broken above the coveted $50 mark and is up nearly 10% from its early February panic low level. The Zacks Consensus Estimate for its current-year earnings advanced 6.7% in the last 60 days. The stock’s expected earnings growth rate for the current and next quarters are 7.6% and 11.1%, respectively. The company has a Zacks Rank #1.

ON Semiconductor Rides on Automotive Segment

ON Semiconductor Corporation (ON - Free Report) is currently positioned to break its January high, banking on improving end markets and successful integration of big acquisitions like AMIS. But, product growth in areas like automotive cameras and IoT offerings are mostly driving the company’s bottom line.

The Zacks Consensus Estimate for its current-year earnings improved 4.2% in the last 60 days. The stock’s expected earnings growth rate for the current quarter and year are a superb 85.7% and 18.5%, respectively. The company has a Zacks Rank #2.

Lam Research to Return Cash to Investors

Lam Research Corporation (LRCX - Free Report) is trading at the high end of a five-month range near $220. Management’s recent decision to return a minimum of 50% of cash flows to investors in the next five years in the form of dividends and repurchases boosted the share price. Lam Research is also benefitting from robust equipment demand, strong demand in the memory segment, strength in logic and foundry segments and increased adoption of 3D NAND technology.

The Zacks Consensus Estimate for its current-year earnings rose 15.7% in the last 60 days. The stock’s expected earnings growth rate for the current quarter and year are a stellar 55.7% and 67.7%, respectively. The company has a Zacks Rank #1.

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