The companies grouped under the Semiconductor – General category produce a broad range of semiconductor devices serving multiple end markets.
According to the Semiconductor Industry Association (SIA), the U.S. is the largest producer of semiconductors with 44% market share. The group estimates that overall semiconductors grew 13.7% in 2018 driven by double digit growth in the automotive, computing, communications, government and industrial markets.
There are some major themes shaping the industry-
First, being on the building-block side of technology, it will continue to benefit from the proliferation of the Internet and the growing digitization of our lives in the foreseeable future.
Second, because of the growth potential in emerging markets, regulatory (and/or political) issues, particularly in places like China, can play an increasingly important role. In this context, the government’s positive tone around its ongoing talks with Beijing is encouraging as a deal would mean that trade war concerns can be laid to rest. Semiconductor companies in particular stand to benefit because the Chinese government’s drive to build its own industry will require plenty of collaborations with leading semiconductor players.
Third, because end devices have to be priced lower to reach more people, the pressure on companies to bring down cost will remain. So companies will find it advantageous to move operations to places where labor may be cheaper or the proximity to manufacturing facilities can lower transportation and other cost. Industry consolidation is also likely to continue as the cost of developing new designs has increased manifold.
Fourth, we are likely to see more often is close collaboration with device makers facilitating quicker consumption and better inventory management.
Zacks Industry Rank Indicates Limited Returns
The Zacks Semiconductor-General Industry is a stock group within the broader Zacks Computer and Technology Sector. It carries a Zacks Industry Rank #212, which places it at the bottom 17% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimate for the current year has declined by 1.4%.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Leads on Stock Market Performance
The Zacks Semiconductor – General Industry has led the broader Zacks Computer and Technology Sector as well as the S&P 500 index over the past year.
The industry appreciated 7.3% over this period compared to the S&P 500 index’s increase of 2.8% and the broader sector’s increase of 5.2%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of forward 12-month price-to-earnings (P/E) ratio, which is a commonly used multiple for valuing soft semiconductor companies, we see that the industry is currently trading at 16.28X, just above the 16.20X median value but below the S&P 500’s 17.00X. It is however below the sector’s forward-12-month P/E of 19.57X.
Over the last five years, the industry has traded as high as 19.73X, as low as 12.78X and at the median of 16.03X, as the chart below shows.
Forward 12 Month Price-to-Earnings (P/E) Ratio
This isn’t the best place to invest in right now, but prospects are likely to look up as the U.S. comes to an understanding with China and smartphone demand gathers momentum in the back half of the year. So while the more cautious of us might wait for a better entry point, here are some stock picks for the rest:
Intel Corp (INTC - Free Report) : This Zacks Rank #2 (Buy) stock has gained 14.6% over the past year. The Zacks Consensus Estimate for the current-year EPS remains unchanged in the last 60 days.
Price and Consensus: INTC
STMicroelectronics (STM - Free Report) : The Zacks Rank #3 (Hold) stock has lost 20.5% over the past year. The Zacks Consensus Estimate for the current-year EPS moved up a penny in the last 60 days.
Price and Consensus: STM