The semiconductor and related-products industry is one of great relevance for the technology field, but also, in our day-to-day lifestyle. As the world becomes “green,” concerns about energy consumption arise and those companies producing power-saving or energy-efficient products seem to be poised to outperform the market in the years to come. Although many companies have done well in this field over the last decade, going forward, Infineon Tech, Linear Technology Corporation (NASDAQ:LLTC) and Cree, Inc. (NASDAQ:CREE) are companies that deserve a look due to their prospects in upcoming, eco-friendly times.
Infineon: A European leader
Infineon Tech is one of the leading chipmakers in Europe with a market cap of $8.9 billion, born from a Siemens spinoff in 2000. However, it designs and manufactures not only semiconductors, but also memory components, microcontrollers, integrated circuits, digital and analog sensors, and fiber optics. Its scale makes it a go-to choice for many big customers seeking for a company that can supply their huge demand volumes.
Focusing on analog semiconductors provides the firm with several advantages; namely:
1). Decreased competition due to high R&D initial costs
2). Reduced R&D expenses for the company, since the product is already developed and tends to enjoy from a long useful life
3). Hgh switching costs for existing customers of the firm and little incentives for them to switch
4). Its expertise on chip customization is very important for analog technologies and, therefore, constantly attracts new clients
One of the main growth drivers in the upcoming years is expected to be the automotive sector, in which the company holds a strong position. As the carmakers’ demand for sensors, electric displays and other semiconductors increases, the company should see widened profits and margins. Furthermore, Infineon should also benefit from the growing demand for energy usage optimization, a segment to which the firm is substantially exposed as well, mainly through its power management semiconductors.
By getting rid of unprofitable business segments and making huge capital (and R&D) investments, the company has reduced its risks and made a strong bet on future demand. Following the steps of the successful Columbia Fund, I would recommend buying this stock that offers plenty of growth opportunities in strong markets, is less exposed to challenging ones and trades at a 19% discount to the industry average valuation, at 20.4 times its earnings (and is also cheap in relation to its sales and book value).
Linear Technology: Diversity & Quality
Linear Technology Corporation (NASDAQ:LLTC) is a chipmaker that specializes in designing and manufacturing high-performance analog semiconductors. However, it is safe to say that this is a diversified company, as it also produces operational instrumentation and audio amplifiers; voltage regulators, power-management devices, DC-DC converters and voltage references; comparators; monolithic filters; communications interface circuits; one-chip data acquisition sub-systems; pulse-width modulators and sample-and-hold devices (Linear Press Dept.).
Producing high-performance products, the firm has attracted several huge customers that are willing to pay a premium for quality, as it doesn’t really impact much on the final production costs. For the same reasons described above, focusing on analog chips provides an advantage for Linear Technology Corporation (NASDAQ:LLTC) over new industry entrants. Its R&D expertise, specialization and talented engineering team provide a wide moat that helps keep competitors lagging behind. Consequently, the company’s returns have been above industry averages, currently reaching a 21.1% return on assets and a 50.1% return on equity, both considerably above the respective 12.8% and 20.2% industry means. Further growth opportunities in the long term are provided by the automotive and communications segments, which expect strong sales in the years to come and in which Linear Technology Corporation (NASDAQ:LLTC) has a strong position as a semiconductors provider.
Even despite its extremely efficient business model that provides the firm with high returns, significant cash generation capabilities and wide margins – both net and operating margins roughly double the industry averages – its stock trades at a 21.6 P/E ratio, at discount to the 25.1 industry average. Given its strong fundamentals and its compelling growth opportunities, I’d recommend buying this stock, which, by the way, also yields 2.72% in the form of dividends.
Cree: Big Innovation in Energy Savings
Cree, Inc. (NASDAQ:CREE) is a market leader in the design and manufacturing of LED products and semiconductors that increase the energy performance and efficiency in various products, serving from lightning and communications manufacturers to defense-related governmental agencies. As stated by Zacks, “key to Cree, Inc. (NASDAQ: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.”
The thing about LEDs is that, as a much more eco-friendly and energy-saving light source,an upsurge in demand is expected over the coming years. Already used in all kinds of appliances, the expansion on the technology should drive growth even further. Cree, Inc. (NASDAQ:CREE), in particular, seems poised to benefit from this development, as its LED components offer unmatched light units – luminaires – per watt thanks to its patented chemical composition and manufacturing processes. Meanwhile, the firm is making substantial efforts to increase the market´s exposure to its products by selling to competing fixture companies and penetrating the consumer market – the Ruud Lighting acquisition has been and will be crucial for this last target. Governmental agencies and utility companies are also helping the industry progress by granting tax breaks and reimbursements for LED technology users and installers (Morningstar).
However, product commodification stands as a strong threat to the firm´s profitability. Also concerning is the fact that its competitors – which include Samsung, LG and Koninklijke Philips Electronics, amongst others – are getting closer in terms of innovation and product quality, slowly divesting Cree, Inc. (NASDAQ:CREE) from its original pricing power. Trading at 103.1 times its earnings, about 4 times the 25.1 industry mean, and with below-average margins, returns and growth rates, I’d recommend holding for now, even despite its record results reported last quarter, as several headwinds could significantly limit the firm’s upside.
Bottom line
Analog chipmakers like Infineon and Linear Technology Corporation (NASDAQ:LLTC) seem poised to deliver growth in the years to come, not only on the back of their somewhat moated businesses, but also due to an increasing demand of power saving, efficient and customizable semiconductors as we enter a new “eco-friendly” era. Given past performances, development prospects and reasonable valuations, I would advocate on adding these two firms to your portfolio, while keeping a close eye on the operations of chip and LED maker Cree.
The article 3 Tech Companies That May Help to Make Our Lives Better originally appeared on Fool.com and is written by Damian Illia.
Damian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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