Christopher Rolland, Analyst with FBR Capital Markets, says tougher times may be ahead for Fairchild Semiconductor Intl Inc (FCS). He says the company faired well in 2010 and 2011 because it is levered to mobile handsets, the iPhone in particular. As a result, he says the company wasn’t forced to reduce headcount or trim opex, like many so-called supercyclicals had to do during that time period.
“They didn’t have to make those decisions because they have the luxury of the handset tailwind behind it, the smartphone tailwind behind them,” Rolland says. “However, over this cycle, those decisions not to cut heads, not to become lean and mean when the others did have hurt them in this cycle. So we do believe that they are taking their medicine now.”
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Rolland says he believes Fairchild is beginning to trade closer to what he thinks is fair value. He says he’d be enthusiastic if the stock was around $12 or $13.
“About $10.50 or $11 is book value for this company, which we think is pretty generally a floor for these types of supercyclicals. So that would sum up our thinking, I would say, on Fairchild. Again, that would be a name that if we had a cyclical reset here that we would like to scoop off the bottom,” Rolland says.
RBC Capital Markets Analyst Doug Freedman says Inphi Corporation (IPHI) is currently one of his top stock picks. He says the company plays in both the communications and the memory markets, and investors could see more than 30% upside to the stock.
“The memory market is going to go through a transition to DDR4, and I believe that that could be a very strong positive catalyst as well as a very bullish outlook for the company’s products and the communication end market,” Freedman says.
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Inphi is one of the fastest-growing companies in his semiconductor universe, Freedman says. And, he says investors may not be giving the company full credit for recent changes.
“They recently also did a very accretive acquisition that I think is being underappreciated by the market at this time,” Freedman says.
Stephens, Inc. Analyst Harsh Kumar says the emerging trend of wireless charging could represent a significant opportunity for Integrated Device Technology Inc (IDTI). In fact, he says IDTI is widely speculated to have won Apple Inc’s (AAPL) iWatch.
“There are literally only two companies that have those chips today, functioning chips, and that’s TI (TXN) and IDTI,” Kumar says. “The industry is growing about 100% at a minimum for the next foreseeable number of years.”
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Kumar says IDTI also has an opportunity in the power RF area. He says the company currently does about $2 million in revenue per quarter in that area, but that they potentially have design wins for $10 to $15 million a quarter two years out.
“So that’s another area that could be a very nice $50 to $60 million on a topline basis per year,” Kumar says. “The company has $450 million in cash, no discernible need for cash. So it’s about $3 a share in cash. And we think the earnings for this company will keep going up, and also they should benefit from better-than-normal growth.”
Harsh Kumar, Analyst with Stephens, Inc., says the Street misunderstands the accretion that comes from RF Micro Devices, Inc.’s (RFMD) recent merger with TriQuint Semiconductor (TQNT). He says the deal combines RFMD with its closest competitor, and should be completed by the end of the year.
“They have taken a shot as a management that a reasonable level of accretion that they will get, and they have highlighted conservatively $150 million of cost savings on a combined company revenue stream of $2.5 billion,” Kumar says. “So if you take a look at that number, you’d say well, that alone by itself in all metrics is 6% to 7% to 8% kind of an accretion on an operating margin.”
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However, Kumar says his research indicates a greater level of accretion. He says he and his team have come up with greater than $5 in earnings power for the combined company two years after the deal is done.
“We come up with 30%-plus consistent operating margin model, and we come up with $4 to $5 in cash generation for the new company,” Kumar says. “The new company will have a new name; it will also have a new ticker. But the way to get into the new company is you can either buy a share of TriQuint or you can buy a share of RFMD and basically, given that the merger news is public, the two trade in sort of tandem, and there may be a penny sort of an arbitrage, but typically they are pretty close together.”
Some investors speculate that Texas Instruments (TXN) might buy NXP Semiconductors NV (NXPI). But Steve Smigie, Analyst at Raymond James & Associates, says he doesn’t think that will actually happen.
“I don’t know that TI would necessarily be interested in that, nor do I think NXP would be. Some people suggest there is a tax inversion scenario,” Smigie says. “In order to acquire somebody of NXP-size, you’d have to have someone like TI or Intel (INTC) doing it, and I don’t see that happening. I don’t feel rationale for it.”
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Smigie says he expects NXP to continue to execute. He says the company has a lot of drivers in terms of gains with near-field communication and secure element both in terms of handsets and in terms of bankcards.
“But if we’re looking to out years, we think you’ll see pretty meaningful pickup in their average dollar content on automobiles, and we think you’ll see them continue to do well on the comm infrastructure side,” Smigie says. “I think they’ll continue to do well in their standard products business as well. So there’s lots of opportunity there for NXP to continue to do well and outperform.”
RBC Capital Markets Analyst Doug Freedman says Marvell Technology Group Ltd. (MRVL) is currently his top pick among semiconductor stocks. He says the current valuation is attractive and that there is opportunity for equity value appreciation whether business goes well or goes against the company.
“They are trying to compete in the wireless handset space. If, in fact, this goes against them, I believe they could exit the business the way Broadcom (BRCM) did and equity investors would be rewarded,” Freedman says. “There are also legal issues that have recently gone against the company that I think if those turn around, you could get a very positive reaction in the shares.”
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Meanwhile, Freedman says the market is definitely discounting the possibility that Marvell will do well in the wireless market.
“So Marvell is my top pick,” Freedman says. “We presently see north of 55% upside to where that stock is trading.”
Christopher Rolland, Analyst with FBR Capital Markets & Co., says he is waiting for a modest reset in the semiconductor cycle. He expects to see some intermediate-term choppiness, followed by a modest cyclical downturn in 2015. If that scenario plays out, he says Texas Instruments Incorporated (TXN) will be one of the first companies he would consider upgrading.
“There are a bunch of things that we like about TI: We like that they bought a ton of capacity at the bottom of the last cycle during the financial crisis primarily,” Rolland says. “They still are only running in the 60% utilizations level. If a semi cycle was to get really hot, they would be one of the few people to actually have capacity. That’s one thing we like about them.”
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Rolland also says there is a mismatch between TI’s depreciation that they realize on their income statement and the ongoing capex reflected on their cash flow statement.
“So we see a nice mismatch between free cash flow and earnings per share that — we happen to be cash flow guys,” Rolland says. “We are very attracted to that high free cash flow yield and the fact that earnings are actually understated by TI.”
Steve Smigie, Analyst with Raymond James & Associates, says he sees solid growth opportunities for Skyworks Solutions Inc (SWKS) in the remainder of 2014 and into 2015. He says the stock has had a decent run, and he wants to watch how that growth plays out.
“With regard to Skyworks, again, we see massive dollar content gains on handsets for the RF semis here, and we’ve still got a billion phones in China that are 2G phones that need to be converted,” Smigie says. “There are lots of phones to be converted to higher dollar content.”
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As Wi-Fi, GPS and other wireless capabilities are being added to multiple devices, Smigie says Skyworks is also moving aggressively into the Internet of Things area, which he says represents another of area of opportunity. And, he says Skyworks has done well on the margin side.
“I think you’ll see them manage their margins pretty carefully there, and so there should be some decent leverage in that name still as well,” he says.
David Pritchard, CEO of KaloBios Pharmaceuticals Inc (KBIO), says the company is looking for partners for its KB001-A and KB004, which are both in Phase II clinical testing. KB001-A is targeted against a bacterium called Pseudomonas aeruginosa, and it has been studied for treatment for cystic fibrosis. KB004 is a humaneered antibody that is being studied for the treatment of acute myeloid leukemia, or AML; myelodysplastic syndromes, or MDS; and myelofibrosis.
“Partner selection indeed is very important in that you are trying through partnering to accelerate your program and move it forward,” Pritchard says. “In my experience, small companies often tend to move more quickly in their early stages. However, when you get past proof of concept, I think bigger companies can — particularly on a global basis — often conduct large pivotal studies, approvals, launches and reimbursement programs better than small companies, in light of their experience and resources.”
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Pritchard says KaloBios is seeking partners for KB001-A particularly for hospital-associated infections, such as the ventilator-assisted pneumonia area and outside of the United States for cystic fibrosis.
“In the cancer program, we are seeking partners who could help us expand the development of KB004 into solid tumors as well as different geographies,” Pritchard says. “For that product, we envision a side-by-side co-development-type program where we could imagine focusing on different indications between ourselves and the partner, and equally sharing the benefits.”
Dr. Y. Katherine Xu, Analyst with William Blair & Co., says Ariad Pharmaceuticals, Inc. (ARIA) has the potential for 100% upside from current levels. She says the stock is being ignored by investors because its leukemia drug, Iclusig, was suspended from marketing because of safety issues, but has now been relaunched with some safety precautions.
“People felt that it was a tainted story,” Xu says. “But I think, in the end, this is the most potent drug for this particular leukemia, and after patients failed all the other therapies, the patients will come to this drug, and then with good management of side effects and effective dosage reduction, this drug should be used in most patients and make a difference.”
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Xu says she thinks Ariad’s sales from Iclusig could peak at $700 million. Since the stock has been ignored for quite some time, she says now is a good time to enter.
“Since the relaunch, a lot of doctors have been using the drug at lower doses, and it seems to be fine,” Xu says. “It’s basically about informing the market and practitioners and patients well about the safety profile and how to manage the adverse events. And then eventually, if you talk to doctors, they’re like well, after patients fail all the other therapies, this is the only option.”
