The semiconductor sector may be worth examining due to signs
of firming global growth and the backdrop of favorable
expectations for electronic sales. The U.S.
manufacturing PMI has posted readings in the mid 50's over the
past two months recovering from a recent low of 49.0 in May. At
the same time, the August JP Morgan Global Composite Output Index
rose 1.2 to 55.0, hitting a two and half year high and suggesting
the growth picture is not limited to the U.S.
Smart phone and tablet demand expected to
The upswing in economic growth is complemented by a favorable
outlook for the sale of technology product. The
International Data Corporation recently forecast that global
smartphone shipments would rise 40% in 2013 to over 1.0 bln
phones. Carrier subsidies and lower cost devices were
expected to fuel growth. By 2017, smart phone shipments are
projected to hit 1.7 bln units. However, the IDC did cut its
outlook for 2013 tablet sales by about 2 mln units to 227.4
mlu. None-the-less, longer term growth is expected to be
healthy with worldwide shipments projected at 407 mlu by
Semiconductor capital spending is forecast to rise with
The SEMI World Fab Forecast suggests that spending on fab
equipment will rise 25% to a record $39.4 bln in 2014.
Moreover, spending is expected to rise 30% to 40% in the
second half of 2013 compared to the first half of 2013.
Strong capital spending will be supported by healthy sales,
as Semiconductor revenues are projected to rise 8% in 2014.
Aggressive capital spending plans are a vote of confidence
in sales and the semiconductor industry's health.
Backlog is building:
The book to bill ratio in North America has been 1.00 or above
since January 2013 and points to healthy activity in the
semiconductor sector. Moreover, the growth in bookings rose
into positive territory on a year over year basis in July and may
be pointing to an upswing in demand. Comparisons are easy and the
rise in bookings could benefit investor interest in the
Looking at the chip sector from another angle, the Commerce
Department's unfilled orders for computers and electronics
products continues to trend higher and work above the old peak
established in 2000. The growth rate is also positive on a
year over year basis pointing toward continued expansion.
The trend in backlog is a positive sign for future business
Names to watch
In order to narrow down the candidates for investment in the
semiconductor sector, a handful of companies with a Zacks Rank #1
(Strong Buy) or Zacks Rank #2 (Buy) were examined. The
table displays the names, ticker symbols, and valuation measures
for each of the companies in the sector. Three valuation
measures were chosen to screen the companies for investment
(click table to enlarge)
Price to tangible book
: This valuation looks at the price relative to the
theoretical breakup value of the company. Because of the
cyclical nature of earnings in the chip sector, the tangible book
value of the company should gradually work higher over time if
the company is successful in generating profits. Intangible
assets, like goodwill, are taken out of the equation as they have
little impact on breakup value. Because of the
cyclical nature of the chip sector, earnings can be negative or
small at times which makes it more difficult to use a price to
earnings ratio to analyze valuation. Companies with
low price to tangible book values are deemed as inexpensive or
Price to sale
s: This measure uses the share price divided by sales per share
to determine if a company is cheap or expensive. The
semiconductor sector is cyclical and as a result companies can
swing from being unprofitable to profitable. The
price to sales ratio may be a stronger indicator of company
valuation and potential profitability. A low price to sales
figure is a sign of cheap valuation.
: The PEG ratio measures the price to earnings ratio relative to
the growth rate of earnings per share. Semiconductor shares
can be fast or slow growing companies at times, so high PE ratios
must be viewed in the context of the growth rate in
earnings. Looking at the PE ratio by itself may
distort the valuation. A PEG ratio of 1.0 suggests that the price
to earning s ratio is in line with the growth rate. Values
near or below 1.0 would been seen attractive. An investor would
not be "over paying" for growth.
In order to provide a summary or conclusion, each stock
was given a position number for each of the valuation measures.
A 1 indicates the most attractive valuation or lowest value
in the table, while a 9 indicates the most expensive valuation or
the highest value in the table. The position numbers were
averaged. The lowest average is in theory the most attractive
stock, while the highest average would be the least desirable
Breaking out the results:
On the basis of the price to tangible book ratio, Triquint (
) is the cheapest, while Cyprus (
) is most expensive.
Looking at the PEG ratio, MagnaChip (
) is the most inexpensive, while Supertex (
) is the most expensive. However, MaxLinear (
) has a negative or non-meaningful value, which puts it in the
highest position of 9.
Based on the price to sales ratio, Monliithic Power (
) is most richly priced, while Magnachip has the lowest ratio and
appears most attractive.
MagnaChip and Triquint posted the lowest average values at
2.00 and 3.00 respectively. They appear most attractive based on
the combination of valuation measures. MagnaChip is priced well
below its expected growth rate and less than 1.0 times
sales. MagnaChip designs and manufactures analog and mixed
signal semiconductor products with applications in the tablet,
mobile phone, automotive, and power supply space, to name a few.
Triquint makes chip products with applications in the
defense/aerospace, networking, and mobile device industries.
) and Intersil (
) were also on the cheap side. Their PEG ratios were near or
below 1.0 and their price to sales ratios were below 2.50.
SanDisk makes flash memory and storage devices, while Intersil is
a designer and manufacturer of high performance analog
semiconductors. It has exposure to a broad range of
telecom, broadcast, solar, energy, industrial, and auto
When choosing a stock, earnings may be as important or more
important than valuation. Just looking at valuation can
lead to a "value trap". In a value trap, a stock looks cheap
based on measures of valuation, but is priced with a discount for
a reason - there is a limited growth outlook.
(click table to enlarge)
There has not been great movement in earnings estimates in the
chip sector - see the table. Monolithic Power has actually
shown the greatest upward revision to 2013 and 2014 earnings per
share estimates. Its valuation was toward the poor side of
the group, and it appears the market is pricing strong growth.
Notice that EPS estimates have been increased $.07 to $0.62
this year and $.08 to $.90 next year. It is forecast to
post a vibrant 45% increase in earnings growth, but is priced at
5.41 times sales.
Magnachip saw its 2013 EPS estimate cut by $.01 for 2013, but
the 2014 EPS forecast was raised $.06 to $3.00. It is
expected to post a 20% growth rate. The upward revision to
2014 should offset the downward revision to 2013.
It should be noted that there were no other changes to
estimates over the past 30 days and Cyrpus is expected to post
the quickest change in EPS growth from 2013 to 2014 at 189%.
Notice the relatively high PEG ratio.
The combination of inexpensive valuation and earnings
revisions suggests that MagnaChip may provide an attractive
investment opportunity. It wins the award for the best pick
in the small universe examined. It has the combination of the
cheapest valuation and upward revision to earnings estimates.
Triquint, SanDisk, and Intersil would be the next picks based
on valuation and their Zacks Rank of #1 or #2.
With signs of stronger economic growth, a healthy backlog of
electronic orders, and building order books in the chip sector,
it may be worth trying MagnaChip in your portfolio.
CYPRESS SEMICON (CY): Free Stock Analysis
INTERSIL CORP (ISIL): Free Stock Analysis
MICROCHIP TECH (MCHP): Free Stock Analysis
MONOLITHIC PWR (MPWR): Free Stock Analysis
MAGNACHIP SEMI (MX): Free Stock Analysis
MAXLINEAR INC-A (MXL): Free Stock Analysis
SANDISK CORP (SNDK): Free Stock Analysis
SUPERTEX INC (SUPX): Free Stock Analysis
TRIQUINT SEMICO (TQNT): Free Stock Analysis
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