ARM Holdings plc (NASDAQ:ARMH) and Broadcom Corporation (BRCM), two semiconductor companies in the technology sector with solid growth and strong cash flow, had received positive calls from analysts recently. ARMH is well positioned for mid-to-long term growth while BRCD is benefiting from Samsung's (OTC:SSNLF) new S4 launch and China Mobile's (NYSE:CHL) TD-LTE expansion. Both stocks will be analyzed fundamentally and technically in this article. Investing strategies will also be presented.
ARM Holdings plc
ARMH was up 0.36% and closed at $41.91 on March 15, 2013. ARMH had been trading in the range of $21.64-$44.47 in the past 52 weeks. ARMH has a market cap of $19.29B with a relatively low beta of 0.88.
"We see development in four market areas (mobile computing, datacentres, networking, Internet of Things) as key to the emergence of ARM as the architecture of choice for the mid-to-long term. ARM remains well-positioned for the mid-to-long term given: (1) rising royalty rates (cortex-A driven; later ARMv8), (2i) record licensing (j/est backlog of $570m+), (3) upcoming tax benefits (dropping to c.17% effective tax rate long term), and (4) Opex control showing through. Overall, we expect earnings growth (3-year CAGR of 40%) to continue largely unperturbed through 2013-16e."
Analysts currently have a mean target price of $42.89 and a median target price of $44.00 for ARMH. Analysts are estimating an EPS of $0.21 with revenue of $249.83M for the current quarter ending in March, 2013. For 2013, analysts are projecting an EPS of $0.87 with revenue of $1.06B, which is 15.80% higher than 2012. Analysts are also predicting 17.50% increase in revenue for 2014.
According to the Semiconductor Industry Association, the World Semiconductor Trade Statistics predicts the global semiconductor market to grow by 4.5 percent in 2013 after declining 3.2 percent in 2012. The global semiconductor industry posted total sales of $291.6B in 2012, which was the third highest ever, but had declined from the record $299.5B set in 2011. The industry began to show some strength in Q4 as it posted sales of $74.2B, which was a year-over-year increase of 3.8 percent.
There are a few positive factors for ARMH:
- Higher revenue growth (3 year average) of 23.7 (vs. the industry average of 11.9)
- Higher operating margin of 36.1% and net margin of 27.9% (vs. the industry averages of 22.7% and 17.1%)
- Zero debt/equity (vs. the industry average of 0.3)
- ARMH generates an operating cash flow of $252.19M with a levered free cash flow of $83.16M
- ARMH offers a forward annual dividend yield of 0.60%
Technically, the MACD (12, 26, 9) is showing a bearish trend, but the MACD difference starts to converge. The momentum indicators, RSI (14), is picking up but still indicating a slightly bearish trend at 45.79. ARMH is currently trading below its 50-day MA of $42.07 but above its 200-day MA of $32.12, as seen from the chart below. ARMH had broken through its 50-day MA but failed to close above it in the last trading day.
How to Invest
With expected 3-year CAGR of 40% for earnings growth and strong margins, ARMH still has more room for upside. However, in the near-term, it is important to see if ARMH can hold above 50-day MA to determine its near term direction. If ARMH can hold up, a credit put option spread of July 20, 2013, $36/$38 put can be reviewed for bullish investors. Investors can also review the following ETFs to gain exposure to ARMH:
- Market Vectors Semiconductor ETF (NYSEARCA:SMH), 4.64% weighting
- WCM/BNY Mellon Focused Growth ADR ETF (NYSEARCA:AADR), 4.51% weighting
BRCM was down 1.58% and closed at $34.65 on March 15, 2013. BRCM had been trading in the range of $28.60-$39.66 in the past 52 weeks. BRCM has a market cap of $19.71B with a beta of 1.20.
On March 13, 2013, RBC Capital analyst Doug Freedman reiterated an outperform rating and $45 price target on BRCM saying Samsung orders may begin to surface faster-than-expected. As quoted,
"Post conversation with IR, we have increasing conviction that ramp at Samsung (rising penetration into higher value road-map and traction in China), could be more impactful than investors suspect. As a result, its Mobile & Wireless group could grow more near with its 5-year JunQ seasonal average of +12% Q/Q (vs. our +8% and Street/+8%). Samsung now accounts for ~17% of sales vs. Apple's ~15%, as Samsung sales grew 87% Y/Y to $1.385bil in 2012. In addition, today's news surrounding STMicro's inability to find a buyer, after a 3-month search, represents an incremental positive for BRCM."
With Samsung's Galaxy S IV (S4) launch, investors are paying attention now to S4 suppliers QUALCOMM (NASDAQ:QCOM), RF Micro Devices (RFMD), Skyworks Solutions (NASDAQ:SWKS), and Broadcom Corp. Analyst Mike Burton of Brean Capital stated,
"While we view QCOM & RFMD as the biggest content share gainers in the GS4, we believe SWKS has offset some of the RF losses with WiFi and Analog content (which carries higher margins). BRCM may not be a big dollar content gainer in GS4, but we believe they have kept the socket (despite fears of losing it)."
On the other hand, BRCM also benefited from China Mobile's increasing CapEx ($30.6B) in support of TD-LTE. RBC Capital analyst Doug Freedman views this as an incremental positive for those exposed to the wireless communication equipment market and wireless ecosystem. On the wireless ecosystem side, Broadcom provides combos and basebands, where TD-LTE is coming in 2014.
Analysts currently have a mean target price of $40.62 and a median target price of $40.00 for BRCM. Analysts are estimating an EPS of $0.56 with revenue of $1.91B for the current quarter ending in March, 2013. For 2013, analysts are projecting an EPS of $2.78 with revenue of $8.45B, which is 5.50% higher than 2012. Analysts are also predicting 10.20% revenue growth for 2014.
There are a few positive factors for BRCM:
- Higher revenue growth (3 year average) of 21.3 (vs. the industry average of 11.9)
- Lower debt/equity of 0.2 (vs. the average of 0.3)
- Lower P/B of 2.6 (vs. the industry average of 2.7)
- Lower Forward P/E of 12.2 (vs. the S&P 500's average of 13.9)
- BRCM generates an operating cash flow of $1.93B with a levered free cash flow of $1.29B
- BRCM currently offers a forward annual dividend yield of 1.30%
Technically, the MACD (12, 26, 9) indicator is showing a bullish trend. RSI (14) is declining but still indicating a slightly bullish lean at 56.02. BRCM is currently trading above its 50-day MA of $33.99 and 200-day MA of $33.38. The next resistance is $35.52, the R1 pivot point, followed by $36.96, the R2 pivot point, as seen from the chart below.
How to Invest
In the near to mid-term, BRCM should benefit from Samsung's orders and China Mobile's aggressive expansion in TD-LTE network. BRCM remains a good long-term holding with its solid cash flow, steady growth, and a healthy balance sheet. For bullish investors, a credit put option spread of May 18, 2013 $31/$33 put can be reviewed. Investors can also review the following ETFs to gain exposure to BRCM:
- PHLX SOX Semiconductor Sector Index Fund (NASDAQ:SOXX), 7.72% weighting
- Market Vectors Semiconductor ETF , 4.84% weighting
Note: All prices are quoted from the closing of March 15, 2013. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.
Disclosure: I am long CHL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.