The semiconductor industry is very well poised to benefit from all the major technology trends such as cloud computing, IoT, self-driving cars, drones, industrial and other automation, smart cities, 5G Internet, you name it. That’s because none of these things can be operational without these little integrated circuits serving to store, process, transport, transmit or receive information. As we move towards a more connected world where humans not only talk to each other, but also to their machines and machines also increasingly talk to each other, the need for semiconductor devices can only increase hereafter.
So it’s not hard to imagine that there would be investment opportunities in the segment and that’s what this article is about. To make the investment decision easier, I’ve picked on companies with a Zacks Rank #1 (Strong Buy). You can also see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. They also have a VGM score A.
As many Zacks.com readers already know, the VGM score essentially captures the investment style (and therefore also the risk appetite) and breaks down as the value-growth-momentum score. So if a stock has a Value score A, value investors should be interested in that stock, if it has a Growth Score A, it would be ideal for growth investors and so on. So a VGM score of A indicates that no matter what your investment style, you should take a look at these stocks:
Ichor Holdings Ltd. (ICHR - Free Report)
Fremont-based Ichor Holdings is engaged in the design, engineering and manufacturing of critical gas and chemical delivery subsystems used in the etch, deposition, electroplating and cleaning processes of semiconductor manufacturing. It operates in the U.S., UK, Singapore and Malaysia. The company had its IPO at the end of 2016, so supporting numbers are limited. But it’s encouraging to note that:
2017 earnings estimate up 48.5% from Jan 2017 to $2.42
2018 earnings estimate up 54.1% from Jan 2017 to $2.85
In the December 2016 quarter, it missed estimates, following that up with a beat in the March quarter and a match in the June quarter, so not a great track record just yet.
However, given the capital intensive nature of the business, it’s encouraging to note that the debt-to-total capital ratio is just 17.9% and that the company has a current ratio of 1.79X, a quick ratio of 0.96X and a book value per share of 7.0X.
As far as valuation is concerned, the P/E based on forward 12 months earnings shows a median value of 11.2X for ICHR compared to 12.4X for the industry and 17.9X for the S&P 500.
MagnaChip Semiconductor Corporation (MX - Free Report)
Headquartered in Chungbuk, South Korea, MagnaChip Semiconductor Corporation operates as a designer and manufacturer of analog and mixed-signal semiconductor products for high-volume consumer applications. It operates through the Display Solutions, Power Solutions and Semiconductor Manufacturing Services segments. So in addition to consumer markets like LCD, LED and 3D televisions and displays, mobile PCs, and mobile communications and entertainment devices, it also offers specialty analog and mixed-signal foundry services for fabless semiconductor companies.
While MagnaChip’s 2017 earnings estimate continues to trend down, the estimate for 2018 is up 32.8% since March. This isn’t surprising since management has more or less completed a big headcount reduction plan, most of the severance and other cost related to which has already been charged to profit and from which it’s currently expected that there will be annualized cost savings in the $23-27 million range. The gross margin is also trending up although not much of this is falling to the bottom line yet because of necessary investments in opex.
The valuation is also encouraging with the P/E based on forward 12 months earnings showing a median value of 12.5X for MX compared to 18.4X for the industry and 17.9X for the S&P 500.
Microchip Technology Inc. (MCHP - Free Report)
Headquartered in Chandler, Arizona, Microchip Technology develops and manufactures specialized semiconductor products including microcontrollers, application-specific standard products (ASSPs) and related mixed-signal and memory products for embedded control applications. The company markets its products to the consumer, automotive, office automation, communications and industrial markets. There’s an upward trend in its estimate revisions:
2017 earnings estimate up 29.6% from Jan 2017 to $5.26
2018 earnings estimate up 22.2% from Jan 2017 to $5.67
The surprise history shows that MCHP has consistently topped earnings estimates in each of the last four quarters at an average rate of 10.2%.
Also, revenues have grown consistently over the last five years with both revenue and gross margin picking up momentum over the last few quarters. The company has been building operating leverage that could help it sustain the current rate of EBIT margin expansion. The per-share book value consequently jumped up in 2016 and appears to be stabilizing now. Encouragingly, this hasn’t had a negative impact on the asset turnover, which continues to rise. Additionally, while debt levels jumped up in 2015 and in the first quarter or 2016, they have stabilized since. As a result, the debt to total capital ratio, which increased through 2015 and stabilized in 2016, is now coming down.
On the valuation side, the stock is attractive because its P/E based on forward 12 months earnings shows a median value of 17.9X compared to 18.4X for the industry and 17.9X for the S&P 500.
Vishay Intertechnology, Inc. (VSH - Free Report)
Vishay Intertechnology of Malvern, Pennsylvania is a leading manufacturer and supplier of discrete passive and active electronic components, particularly resistors, capacitors, inductors, diodes and transistors. It offers one of the most comprehensive electronic component lines of any manufacturer in the U.S. or Europe. Its estimate revisions are trending up:
2017 earnings estimate up 28.8% from Apr 2017 to $1.34
2018 earnings estimate up 65.8% from Apr 2017 to $1.41
The company topped estimates in two of the last four quarters while doubling quarterly earnings over the last two years.
Other encouraging numbers include a debt to total capital ratio of just 20.3%, a constantly improving return on assets of 5.2, a relatively steady book value per share of 11.8X and a growing per-share net cash of 4.8X.
From the valuation perspective, Vishay is worth looking at because its P/E based on forward 12 months earnings shows a median value of 14.4X compared to 25.8X for the industry and 17.9X for the S&P 500.
Micron Technology, Inc. (MU - Free Report)
Boise, Idaho-based Micron Technology has established itself as one of the leading providers of semiconductor memory solutions in the world, serving the computer and computer-peripheral manufacturing, consumer electronics, CAD/CAM, telecommunications, office automation, network and data processing, and graphics display markets.
2017 earnings estimate up 108.1% from Jan 2017 to $4.62
2018 earnings estimate up 141.9% from Jan 2017 to $6.00
The company topped estimates in each of the last four quarters at an average rate of 23.1%.
Micron is seeing very strong demand, leading to solid revenue growth and even stronger gross profit growth. Opex is also stabilizing, leading to very strong growth in EBIT over the last few quarters. The company does have considerable debt, but the debt cap at a little over 40% is manageable.
From the valuation perspective, Micron is attractive because its trailing twelve months P/S shows a median value of 2.0X compared to 2.1X for the industry and 3.0X for the S&P 500.
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