Goldman Sachs published a report entitled “Americas: Technology: Semiconductors” on January 2, 2012. The report isn’t publicly available but we will summarize its main points. In their report, James Covello, James Schneider, Mark Delaney, and Gabriela Borges suggest that the semiconductor sector is expected to perform better than the semi production equipment sector. Semiconductor shipments are currently below trend and fundamentals are likely to improve in the second quarter of 2012. Orders for semi production equipment, on the other hand, are likely to decline by mid-2012. In this article we will focus on Goldman Sachs’ favorite stocks in this industry.
Aeroflex (ARX) engages in the design, engineering, manufacture, and sales of microelectronic products. It has been given a buy rating by Goldman Sachs (GS) which believes that Aeroflex is the most likely stock in their coverage universe that will be acquired in 2012. The company’s ability to do a tax-free spin of its Test and Microelectronic segments will be a positive catalyst for the company in 2012. Growth in 4G LTE is also expected. Shares of the company are currently trading at $12.7 per share and are expected to go north of $14. George Soros had $19 million invested in ARX at the end of September.
Altera (ALTR) is a semiconductor company that designs, manufactures, and markets programmable logic devices, and other products. Goldman Sachs has given it a buy rating and it expects Altera to revert to its previous shipping trends in 2012. With its increased exposure to wireless spending, continued share gains, and its exposure to OEM customers; Altera is expected to outperform in 2012. Shares of the company are currently trading at $37.5 per share and are expected to reach a price target of $44. This price target is based on 17x the normalized earnings per share estimates of $2.60. Billionaire Jim Simons’ Renaissance Technologies had $170 million invested in Altera at the end of the third quarter.
NXP Semiconductors (NXPI) provides mixed signal solutions and semiconductor components. It has been given a buy rating by Goldman Sachs which believes that NXP Semiconductors is best positioned to realize earnings leverage from the bottom of the cycle. With higher utilization, higher sales volume and a shift away from standard to high margin segments, the company is expecting to perform better in 2012. Shares of the company are currently trading at $17.6 per share and are expected to reach a price target of $19. This price target is based on 9x the normalized earnings per share estimate of $2.10. Ricky Sandler’s Eminence Capital initiated a brand new position in NXPI during the third quarter.
Atmel (ATML) is a designer, developer, manufacturer, and marketer of a range of semiconductor integrated circuit products. It has been given a buy rating by Goldman Sachs. A sustainable growth in Atmel’s core microcontroller business, a higher normalized earnings power, an increase in gross margins, and a solid growth in touch controllers will all be positive catalysts for the company in 2012. Its stock is trading at 12x the 2012 earnings per share. Also, its shares are currently trading at $8.9 per share and are expected to reach a price target of $10. Coatue Management initiated a new position in ATML during the third quarter.
Broadcom (BRCM) is a designer and developer of semiconductors for wired and wireless communications. Goldman Sachs has given the company a buy-rating and it remains bullish on Broadcom’s growth opportunities. Broadcom is in a good position to benefit from a growth in the low and mid-range Android smartphone devices. With the introduction of its new 802.11AC WiFi standards, the company is expected to have a stable market share. Shares of Broadcom are currently trading at $31 per share and are expected to go north of $41 by the end of 2012. The price target is based on 18x the normalized earnings per share of $2.30. Bain Capital had $228 million in BRCM at the end of September.
InvenSense (INVN) designs, develops, markets, and sells micro-electro-mechanical systems. Goldman Sachs has given the company a buy rating as it believes that InvenSense is in a unique position to offer growth to investors. Sales are expected to grow at a 35% compounded annual growth rate over the next two years. Goldman Sachs is also of the opinion that motion sensor attach rates are at an inflection point in the smartphones sector, giving InvenSense significant exposure to a positive catalyst. The company is also likely to benefit from the rapid expansion of Android. Shares of InvenSense are currently trading at $13.2 per share.
Semtech (SMTC) engages in the design, production, and marketing of analog and mixed-signal semiconductor products. It has been given a buy rating by Goldman Sachs because Semtech is expected to outperform the analog group. Its growth will likely be caused by the build-out of new optical networks and a strong growth in smartphone units. The company is currently rolling out its best-in-class protection franchise for the smartphone sector. Shares of the company are trading at $25.9 per share and are expected to reach a price target of $30, based on 18x the normalized earnings per share estimate of $1.65. Ken Griffin’s Citadel had $24 million invested in SMTC at the end of the third quarter.
