Tore Svanberg, Analyst with Stifel Nicolaus & Co., says NXP Semiconductors NV (NXPI) is his favorite large-cap semiconductor stock. He says the company’s recent acquisition of Freescale Semiconductor Ltd (FSL) should give NXP significant scale.
“It gives them a number one position in automotive; it also gives them a number one position in microcontrollers, which is a very attractive growth segment, not just for automotive, but also for IoT,” Svanberg says.
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In addition, Svanberg says NXP is also benefitting from the Internet of Things trend. He says much of NXP’s technology and intellectual property is based on security.
“With a lot of these new markets and segments having connectivity, security becomes crucial,” Svanberg says. “So I feel like they are benefiting from three of the key trends that I just mentioned for you: M&A, automotive and also the IoT segments. That is the story behind why we like NXP Semiconductor.”
Tore Svanberg, Analyst with Stifel Nicolaus & Co., says Silicon Laboratories (SLAB) is his favorite midcap semiconductor stock at the moment. He likes the stock because he believes the company is best-positioned among semiconductor companies to benefit from the Internet of Things trend.
“They have made many smaller acquisitions over the last five years, trying to develop the right I.P. to be very competitive in the IoT segment,” Svanberg says.
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Silicon Labs already has close to 40% exposure to the Internet of Things markets, Svanberg says.
“From my perspective, they are really now at the forefront of what it means to be a successful semiconductor supplier for IoT end markets, whether that is wearables or home automation or industrial IoT or any other subsegment of Internet of Things,” Svanberg says.
InvenSense Inc (INVN) has reported slimmer margins in recent quarters, causing concern among some investors. But, CEO Behrooz Abdi says management has plans in place to improve margins.
“So one of those issues is obviously our concentration in mobile. The way we try to address that is obviously not just differentiate on the hardware but also to focus on the software,” Abdi says. “We are currently working on the software side to create some compelling features and use cases for sensors. When we do that, and we take that to market around the software and features like imaging and navigation, it allows us to not only improve our margins but also improve our content in a cellphone.”
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Abdi says margins are also challenged because of the company’s concentration in consumer mobile, which results in increased competition and lower prices and margins. He says InvenSense is starting to diversify into other markets.
“We started this effort last year by growing into adjacent markets like wearables, and we see that, long term, the markets for sensors really plays nicely into this Internet of Things — IoT — which is everything from wearables to motion, remote controls for TVs, smartphone control, automotive, drones, industrial and so on,” Abdi says. “We see a lot of opportunity here, but it will take some time to build those channels. Their volume starting out is not as large as consumer mobile, but over time, it creates a nice diversification in terms of both revenue and margins.”
PMC-Sierra Inc’s (PMCS) Q1 revenue was up about 5% as compared to the same period last year. CEO Gregory Lang says the increase is attributed to growth in the storage business.
“For our storage business, which was 72% to 73% of Q1’s number, we tend to see 5% to 10% seasonality in Q1, but this quarter, storage was down only about 2%,” Lang says. “So it was quite a bit more modest than the normal seasonal decline. And if you look at the year-over-year storage numbers, storage was up 11% year over year for Q1. So we saw very nice growth in that area, and we expect it to continue in the third quarter.”
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However, Lang says the double-digit growth in the storage business was offset by the more challenging carrier business.
“We had a strong start to the year last year in the carrier space, and some of that wireless buildout we were talking about earlier was running at a slower level in Q1 of this year so that offset the storage growth,” Lang says. “But at a high level, we are pleased with the results in storage because it demonstrated some very nice growth year over year, and thus, somewhat offset the slower temporary sales in the carrier space.”
Associate Vice President and Co-Portfolio Manager Paul Condrat of Davidson Investment Advisors says that FleetMatics Group PLC (FLTX) came through his firm’s process of seeking companies with good growth, profitability and valuation characteristics.
“They are a small-cap software company focused on fleet-management solutions for small businesses,” Condrat says. “If you look at fleet management as a whole, from a technology standpoint, the large companies — the long-haul truckers of the world — have great technology to help them optimize their fleets. Medium-size fleets have good technology too. But for small-business owners who typically have seven to 20 trucks within their fleets, the market is largely underpenetrated.”
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Condrat says that small-business owners are not seeing their fleets optimized for fuel-cost savings, personnel or routing. FlleetMatics, Condrat says, is growing very quickly into this area of the market.
“We think they have a dominant lead among competitors and offer a very compelling ROI for their customers. Consequently, we believe there is the potential to double their revenue over the next several years. They are expanding globally with new products, and they still trade at a very reasonable valuation. For a company of this size, it’s very profitable, with 75% gross margins and 30% EBITDA margins,” Condrat says.
Steve Rubis, Analyst with Stifel, Nicolaus & Co., says investors in health care IT should take a look at Medidata Solutions Inc (MDSO). He believes the company is well-positioned to have pricing power over the next five to 10 years.
“It is the idea of what we call the era of biopharma productization. What that means is in the current environment, drugs are focused on running a trial, driving statistical significance, and with hopefully a better outcome than other therapies. And that is what drives the pricing and adoption,” Rubis says. “So in the era of productization, vendors think of Medidata and then CROs, the companies who are able to focus on leveraging data and technology to help biopharma build a better or more complete product, meaning to drive adherence and to drive intelligence around the patient state — and then ultimately help biopharma protect pricing.”
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Rubis says that what Medidata is doing in terms of its patient cloud, and focusing on how to implement and leverage mHealth devices in clinical trials will be a game-changing solution for the company.
“Ultimately, what we think will happen is Medidata Solutions will become the business intelligence tool of record or the must-have solution within biopharma vertical product development,” Rubis says. “We think it is a story that is very exciting, and something that people should be paying attention to.”
Stifel Nicolaus & Co. Analyst Steve Rubis says one significant problem for Allscripts Health Solutions Inc (MDRX) is that its dbMotion business represents an “Achilles’ heel” for the company.
“The issue is unifying Allscripts core systems on dbMotion will not result in the economies of scale or efficiency in R&D as long as you’re running two ambulatory EHRs, an acute EHR — Sunrise Ambulatory and Sunrise Acute EHR,” Rubis says. “There are too many systems, and you need to consolidate/unify those on one platform on the back end in order to drive the network effects.”
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Rubis says Allscripts has done a good job of stabilizing its customer base. He says at the current level of spend, the customer base provides a good baseline for Allscripts.
“The problem is they are never going to be as efficient as athenahealth technologically and developmentally because of the fact that they service too many platforms and fail to unify these systems via a single-instance, multitenant architecture,” Rubis says. “Allscripts platforms are unified through dbMotion, which we think represents a significant Achilles’ heel.”
President and Portfolio Manager Barry James of James Investment Research says one of the macro trends he is seeing is the strength of the dollar. James wants to invest in companies that benefit from lower import prices and more domestic sales, and he says Dillard’s, Inc. (DDS) fits that bill.
“It’s a department store that has been hitting new highs. Management has been buying back shares. We find that consumer confidence is high, and they get the benefit of these lower import prices, so it’s really helpful for them in terms of their earnings and their earnings growth,” James says.
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James says another major trend he is seeing on the buy side also benefits Dillard’s: the drop in oil prices.
“If last year was a year of the bond, then this year is the year of the oil glut. And that translates to transportation companies, and companies that use energy in the production process. It’s really helpful to consumers, which is also helpful to Dillard’s,” James says.
Portfolio Manager Robert Klintworth of Chase Investment Counsel Corporation says his firm has added Sonic Corporation (SONC) as the company is gaining market share and posting good same-store sales every quarter.
“As you’ve seen McDonald’s lose market share, you have seen companies like Sonic picking up market share,” Klintworth says. “They are starting to roll out technology, such as having digital menu boards that are interactive, and they are opening new locations. The company has also generated good free cash flow, which is important to them.”
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Klintwoth says Sonic’s success is due to management’s plan that they’ve stuck to over the years, which has resulted in continuous strong earnings.
“The Founder had a saying that he believed that their customers are worth a mint, and so they give a mint to all their customers. They really focus on what appeals to those customers and cater to them,” Klintworth says.
Charles Rhyee, a Managing Director and Senior Research Analyst covering the health care technology and distribution space at Cowen and Company, says one of the more interesting telehealth models he sees in the current market is clinics forming partnerships in the drug retail channel. For example, he says Walgreens Boots Alliance Inc (WAG) has a partnership with MDLIVE, in which the drugstore chain is piloting a virtual clinic in the back of the store.
“There’s going to be a nurse technician there who can then help you with any type of instrumentation that you need to use, that will send images to the doctor real-time,” Rhyee says.
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People who end up needing a prescription after their consultation can then simply go to the pharmacy desk to pick it up.
“I mean these are the kind of innovative things that I think are starting to happen, and some of that I think investors will get a chance to invest in directly,” Rhyee says.
