(ITRI) Invest in Pockets of Semiconductor Strength – Zacks Industry Rank Analysis

What is consistently ranked an Outperform sector by both buy-side and sell-side over the last two years? — The Info Tech Sector.

In light of this dominant and persistent top-down investing recommendation, look further for top Zacks Ranked industry segments inside IT.  This can help drive your chosen stock’s outperformance.  Furthermore, align closely with the most favorable IT growth segments and the most resilient value propositions.

At the very base of the IT industry is the semiconductor industry.  Semi industries have recently shown us a flurry of Zacks Industry Rank earnings driven upgrades.

On April 1, Semiconductor Industry Association (SIA) president and CEO Brian Toohey wrote this on the front of SIA’s industry website, “Despite persistent economic uncertainty, the global semiconductor industry is off to a promising start in 2013.”  Growth has been underpinned by strength in memory sales and is ahead of last year’s pace.

Semiconductor year-to-date sales through February 2013 were +2% percent higher than at the same point last year.  Regionally, year-over-year sales increased in Asia Pacific (+6.7%) and the Americas (+1.6%), but decreased in Europe (-1.5%) and Japan (-15.7%).

In addition, a solid value proposition in reducing energy demand in new chips can be a source of ongoing competitive advantage.   This is behind earnings strength in top Zacks Ranked stocks CREE and AEIS, discussed below.  Both target the manufacture of a lower energy using and therefore cost-reducing semiconductor.

Top Ranked Zacks Semiconductor Industries to Consider

To think correctly about the semiconductor manufacturing industry as an investor, a vertical integration structure is helpful.  Vertical integration serves as the main semi differentiator.

Four types of semiconductor industry silos exist in that context:

  1. Integrated device manufacturers (IDMs). These companies design, manufacture and sell their chips.  Think of chipmakers like Intel (Zacks Rank #3), Samsung, Sandisk (Zacks Rank #1) and STMicroelectronics (Zacks Rank #3).
  2. Fabless manufacturers.  These companies design and sell chips, but outsource manufacturing to foundry companies.  Think of businesses like Qualcomm (Zacks Rank #2), NVIDIA (Zacks Rank #3), Cree, Inc. (Zacks Rank #2) and AMD (Zacks Rank #3).  Or consider a Chinese mainland fabless company like RDA Microelectronics (Zacks Rank #1).
  3. Foundry companies.  Foundry companies manufacture chips designed and sold by their customers, especially the above fabless companies.  Think about models like the Taiwan Semiconductor Manufacturing Corp (TSM, Zacks Rank #3, but a Zacks Rank #1 a week ago), the world’s first semiconductor foundry and still the leader.  Or its close follower, United Microelectronics Corp. (UMC, Zacks Rank #4) Taiwan’s first semiconductor company formed in 1980 as a spin-off of government-sponsored Industrial Technology Research Institute (ITRI).
  4. At the bottom of the vertically integrated supply chain, consider a specialty semi supplier-to-foundry company like American Energy (Zacks Rank #1).

Type 1

A leader in the four company Semiconductor Memory Industry is SanDisk Corp. (SNDK) at a Zacks Rank #1.

The industry rank is currently 15 out of 265, up a massive +193 in the ranks in just one week, mostly due to its small industry size of four companies.  When a key rank improves, it matters.  The industry has seen 15 positive annual earnings estimate revisions and just 8 negative revisions recently.

SNDK is a flash memory (SIA’s strongest growing segment) company in this industry. It easily qualifies as an Integrated Device Manufacture (IDM) type of company. The company designs, manufactures, and markets flash memory storage products that are used in a wide variety of electronic systems. One notable competitor is Micron.

SNDK is a current Zacks Rank #1 (Strong Buy) with an Outperform rating.

Sandisk reports its Q1-13 earnings on April 18.  It reported Q4-12 adjusted earnings of $0.99 per share in January, crushing the Zacks consensus estimate of $0.68. Results were +135.7% above prior quarter levels.  The beat was mainly attributed to solid recovery in the mobile embedded and retail businesses, strong geographic contributions, and favorable supply/demand metrics.  Expected annual earnings growth is +13% a year, well above the S&P 500 median.

Total revenues for the fourth quarter were $1.54 billion up +21.1% from the previous quarter. The Q4 result came in slightly above the Zacks consensus estimate of $1.52 billion and within the company s guidance.

SanDisk is fairly valued at its current P/E multiple of 16x 2013’s EPS estimate of $3.41, a premium to the industry average.  Its Price to Earning Growth (PEG) ratio remains a low 1.22.

Type 2

The Semiconductor – Discretes Industry offers us Cree Inc. (CREE) at a Zacks Rank #2.

This Zacks industry has three companies in it.  It is currently a #35 rank, down -3 in the last week.  The industry has recently seen six upgrades to earnings estimates and zero downgrades.

CREE is an example of a fabless manufacturer.  The stock is a large cap blend stock with a Zacks neutral rating.  This stock sports a nosebleed 56 forward PE ratio. High earnings growth expectations must be met, quarter after quarter, without a miss.

Cree, Inc. is a manufacturer of semiconductors that enhance the value of solid-state lighting, power, and communications products by significantly increasing their energy performance and efficiency.

Key to Cree’s market advantage is its world-class materials expertise in silicon carbide and gallium nitride for chips and packaged devices that can handle more power in a smaller space while producing less heat than other available technologies, materials and products.

Cree drives its increased performance technology into multiple applications, including exciting alternatives in brighter and more-tunable light for general illumination; backlighting for more-vivid displays; optimized power management for high-current switch-mode power supplies and variable-speed motors; and more-effective wireless infrastructure for data and voice communications.

Cree customers range from innovative lighting-fixtures makers to defense-related federal agencies.

The Semiconductor Analog & Mixed Industry is at a Zacks Industry Rank of #71 out of 265.

There is a full set of 17 companies to look into here.  Recently, the industry has seen four earnings estimate upgrades and zero downgrades.

It offers us RDA Microelectronics, Inc. (RDA) at a Zacks Rank #1.  RDA also gets a Zacks Outperform rating.

RDA operates as a fabless semiconductor company that designs, develops and markets radio frequency and mixed-signal semiconductors for a broad range of cellular, broadcast and connectivity applications.

The company’s product portfolio includes power amplifiers, transceivers and front-end modules, FM radio receivers, set-top box tuners, analog mobile television receivers, walkie-talkie transceivers, LNB satellite down converters and Bluetooth system-on-chip.

Its analog application is sold in China, Southeast Asia, India, the Middle East, Africa, Russia, and Latin America. RDA Microelectronics Inc is headquartered in Shanghai, People’s Republic of China.

Also, consider companies that fall in the Wireless Equipment industry.

This industry currently has a Zacks Industry rank of #107 out of 265. There are 23 companies here.

A safe investment is QUALCOMM, Inc. (QCOM).

QCOM is a Zacks Rank #2, with a Zacks Outperform rating. Its Price and Consensus chart looks very favorable for 2013 and 2014 earnings outlooks.

QCOM develops and delivers chips destined for wireless communications products (cellphones) and services based on the company’s CDMA digital technology.  The forward PE ratio is a lower 16, with a very nice PEG ratio of 1.09.

Expected annual earning growth is strong at +15%.

Type 3

The third vertical to consider is the Semi Fab Foundry Industry itself.

This group carries a Zacks Industry rank of #113 out of 265, with just two companies in it.  One is the dominant Taiwan Semiconductor Manufacturer Co (TSM).  This is a large-cap stock that sported a Zacks Rank #1 a week ago, and is now a #3.  It has a neutral rating.

TSM is the world’s largest dedicated integrated circuit (IC) foundry. As a foundry, the Company manufactures ICs for its customers based on their proprietary IC designs using its advanced production processes. TSM’s goal is to establish itself as one of the world’s leading semiconductor companies by building upon the strengths that have made it the leading IC foundry in the world.

The forward PE is 16.9 and the stock pays a nice 2.4% dividend.

Type 4

At the bottom of the value chain is the Semiconductor Equipment/Wafer Fabrication industry.

This industry has six companies.  It currently shares the #15 rank with the Semiconductor Memory Industry, down -1 from last week.  The industry has seen two positive earnings estimate revisions and no negative revisions recently.

The industry offers us Advanced Energy (AEIS) at a current Zacks Rank #1. This small cap blend stock gets a Zacks Outperform rating, too.

In effect, Advanced Energy supplies semiconductor foundry companies and others.  It creates solutions that maximize process impact, improve productivity, and lower the cost of ownership for its customers.

The company manufactures power conversion and control systems used in plasma-based thin film production equipment. Company’s systems are integrated into semiconductor, data storage, flat panel display, and other industrial manufacturing equipment that utilize gaseous plasmas to deposit or etch thin film layers on materials, or substrates such as silicon and glass.

Advanced Energy operates in regional centers in North America, Asia and Europe.  It offers global sales and support through direct offices, representatives, and distributors,

Note:  AEIS has one sell rating, and one strong sell rating among its four ratings, due to overvaluation concerns. The stock sports an 18 forward price-to-earnings (PE) ratio.

To read this article on Zacks.com click here.

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