FBR Capital Markets Analyst Christopher Rolland says this is a good time for semiconductor companies to be involved in broad-based analog and power management. His top pick on that theme is ON Semiconductor Corp (ONNN).
“Because of the Japanese earthquake, later followed by the Thai flood, which hurt their back-end assembly and test production facilities, coupled with a bad acquisition of a Japanese semiconductor company SANYO, the ON Semi has really lagged the group here, but we believe it has a chance to sort of play catch up,” Rolland says.
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Rolland says that given where we are in the semiconductor cycle, ON Semiconductor can benefit from strong industrial and auto sales. That growth will help the company catch up to some of its peers, which Rolland says have performed well so far this cycle.
“So we think there are a few select catch-up players in power management and analog that we’d be focusing our attention on,” he says.
Oppenheimer & Co. Analyst Andrew Uerkwitz says Atmel Corporation (ATML) is well-positioned to benefit as the Internet of Things trend develops. He says Atmel is one of a handful of companies that makes microcontrollers, which will increasingly be in demand.
“As we move toward Internet of Things, if you think about everybody’s connected devices today, everybody has about three to four connected devices, meaning connected to each other in some way. And we believe within five to 10 years, that’s going to be about 10 devices,” Uerkwitz says. “Everyone’s going to have 10 things that are connected to the Internet or connected to a smartphone or just generally connected whether it’s in the automobile, in the home or in the office.”
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Many devices like thermostats and televisions that may not currently be connected to the Internet will increasingly become “smart devices,” Uerkwitz says. As that trend plays out, those devices will require the components that Atmel supplies.
“So, their core business has thousands of customers trying to add these microcontrollers to devices, consumer electronics, and we think that core business will grow nicely,” Uerkwitz says.
Credit Suisse Group Analyst John Pitzer has a “neutral” rating on Texas Instruments Incorporated (TXN), but he says there is little fundamental risk in the stock. He says there may be better-levered ways to play the semiconductor sector at this point, but he would not recommend selling Texas Instruments.
“It’s a very liquid stock with little fundamental risk, and the management has been very willing to give excess cash back to shareholders in the form of dividend and buybacks,” Pitzer says. “That’s kind of a hard combination to dislike.”
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Texas Instruments plays in the analog and embedded parts of the market, Pitzer says. They are the dominant company in those markets, which Pitzer says makes the stock attractive, particularly to generalist investors.
“They’re going to have continued consistent good cash flows,” Pitzer says. “In fact, if you look at their earnings power from a cash basis, they can earn $3.30 of cash earnings next year; the stock is not that expensive relative to that.”
J.P. Morgan Analyst Harlan Sur says KLA-Tencor Corporation (KLAC) is one of his favorite names in the semiconductor capital equipment space. He says the company is a leader in process control equipment and should see increased demand.
“These are the types of equipment that helps their customers improve yields, monitor their manufacturing lines, measure a lot of the critical parameters in the manufacturing process,” Sur says. “As these processes get more complex…yields are actually more challenging; you have more process steps, which means that you have more process monitoring and more process measurements, and so by the fact that the complexity goes up means that there will be more requirement for KLA’s measurement and yield improvement tools.”
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Sur says KLA-Tencor is currently the number-one supplier of process control tools in the industry. And, he says the company’s financial metrics are attractive.
“They also have best-in-class industry profitability from a gross and an operating margin perspective,” Sur says.
Behrooz Abdi, CEO of InvenSense Inc (INVN), says the company’s last fiscal year was one of investment. He says the company has been building a platform around sensors by investing in software and systems.
“We have to learn what our customer is actually doing with these sensors and bring other value and higher-level value at the system level and the software level,” Abdi says. “So we made a lot of investment in that level and what we are starting to see is the proof point to that. So we have products, for example, that are very low-end raw sensors, and then we have a lot of products that are what we call smart sensors, that we call MotionTracking solutions, and not just motion sensors.”
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Abdi says InvenSense has developed software algorithms that add value at the sensor level. For instance, the company’s smart sensors could add optical image stabilization to a camera phone or improve smartphone navigation systems.
“The sensors can detect activity tracking, for example, in terms of walking, jogging, being on the bike, all of that we can determine with software and algorithms built on top of our sensors,” Abdi says. “And that’s where we see that we can actually capture more value and differentiate ourselves from other competitors.”
Managing Director Diane Wehner of Teton Advisors says Alexion Pharmaceuticals, Inc. (ALXN) is a high-growth company with proprietary technology that’s been growing its revenues above 40% for the last five years.
“[Alexion is] a biotech company with sales of $1.5 billion in 2013,” Wehner said. “They generate revenues from a commercialized drug called Soliris, which is an antibody drug that treats rare diseases. This is the focus of the company…Soliris is literally a wonder drug that saves patients’ lives.”
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As a result, Alexion has huge barriers to entry and competitive advantages, Wehner says. The company has also acquired other drugs in the orphan disease space, opening up further opportunities.
“The company has taken the profits generated from Soliris and they’ve acquired additional drugs that target rare diseases creating a pipeline of opportunities for the next several years…The portfolio has benefited from owning the stock over the last five years, which has appreciated over 771%. It’s been an enormous investment for us,” Wehner said.
Managing Director Diane Wehner of Teton Advisors believes Illumina, Inc. (ILMN) will continue to benefit from its exposure to the genetics sequencing segment.
“[Illumina] is a medical technology company that’s a leader in instruments used in genetic sequencing. DNA sequencing is a rapidly growing segment within health care, as the industry moves toward what we’ve all been hearing about in personalized medicine,” Wehner said.
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Illumina, Inc.’s stock is up 27% year to date and has appreciated over 270% in the past five years, Wehner says. As Illumina continues to innovate, she expects the company to solidify itself as leader in the space.
“They introduced 12 new game-changing products and services at the beginning of this year, which solidifies their technology lead in this space where they face very little competition. We expect the momentum to continue for the company in this subsegment of health care, which is conservatively estimated to reach about $20-plus billion in the next couple of years,” Wehner said.
CEO Curtis Reusser of Esterline Technologies Corporation (ESL) says that 20% of the company’s revenue exists in adjacent markets, which include the medical, gaming and nuclear segments.
“There are three or four areas here where we see opportunity for double-digit growth. The interface controls for the medical business is growing at a very nice pace, and that’s a good market for us,” Reusser said.
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Esterline Technologies also manufactures products for the gaming industry, and is seeing success there, particularly in the Asia market. In Europe the company is seeing growth in the nuclear market, Reusser says.
“We do both connectors as well as containment and insulation systems for new builds and upgrades of existing nuclear reactors, specifically in the U.K. and elsewhere in Europe,” Reusser said.
Reusser expects rapid growth within these adjacent markets, and sees the potential of them being a larger part of Esterline’s overall business.
Senior Analyst Ajay Kejriwal of FBR Capital Markets says that businesses exposed to nonresidential construction, such as Carlisle Companies, Inc. (CSL), are set to benefit as the segment continues to improve.
“We recently published a report talking about nonresidential construction, and this was something we highlighted, saying for the first time in the last three years we’re seeing signs that nonresidential construction is coming back,” Kejriwal said.
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Kejriwal upgraded Carlisle based on this theme. He says the company’s exposure to roofing materials will position it well as the nonres construction market grows.
“The idea there is they have large exposure to roofing materials, and this is roofing material used for commercial nonresidential structures. So as you start seeing more buildout and replacement of existing roofing structures, this would be a company to benefit,” Kejriwal said.
YY Inc’s (YY) stock may be undervalued because U.S. investors don’t fully recognize the opportunity in the Chinese online music market, according to Maxim Group LLC Analyst Echo He. She says Chinese online music is a newer, growing market that is both scalable and profitable. Further, she says YY is a leader in the market, creating an opportunity for investors.
“This online music market, more or less, is similar to the existing online game market. People go online to watch live music performances — there is a host in each video channel; users can register and watch for free; if they like it, they can pay for virtual gifts to these hosts,” He says. “YY takes 60% of whatever users spend online.”
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He says the online music market is essentially stimulating the existing online gaming business. She says online music makes money from individual online users based on their entertainment demand.
“In China these kinds of entertainment activities are in high demand — the regular entertainment activities that we take for granted in this country, like sports, music and all kinds of shows, do not exist,” He says.
