Hold These 2 Semiconductor Stocks For Big Returns

Includes: INTC, XLNX
by: Alpha 7 Trading

The rising demand for longer battery life and faster performance for PCs and mobile devices have motivated speedy innovation and change in semiconductor devices. Indeed, mobile phones and tablets will drive a major portion of the semiconductor market growth this next year, while electronics, automotive and semiconductors for the industrial market segment are also improving.

For the full year of 2013, growth is expected at around 5% to 6%. Nevertheless, in a recent report, Gartner predicts that increased investment in capital equipment will spur growth to be a very strong in this industry over the next two years. In this article, I explore two key semiconductor companies that have grown their business models and have access to all major markets with strong product diversification and innovations. Consequently, they are able to generate massive sales and earnings each year. These two companies are also returning significant cash to shareholders both in the form of dividends and capital gains. These are Intel Corporation (NASDAQ:INTC) and Xilinx, Inc (NASDAQ:XLNX).

How Intel is a Good Stock to Hold

Intel is a leader in computing innovation. The company designs and builds the important technologies that serve as the foundation for the globes computing devices. Recently, Intel has been making massive investments in growth opportunities, including acquisitions, as well as working on restructuring its existing assets. In the past nine months, Intel has completed nine acquisitions qualifying as business combinations in aggregate net cash of $882 million. Its recent acquisition of Stonesoft Corporation will expand its network security solutions, particularly addressing next generation firewall products. Going forward into 2014, the company is planning to keep its focus on investment in tables [SOC, Android], Internet of Things [Intel® Quark, new devices], Multi-comms [LTE] and Technology Development [Extending process technology lead].

In the recent quarter, the company announced restructuring measures including targeted workers reductions as well as the exit of certain businesses and facilities, including its 200mm wafer fabrication facility in Massachusetts. I believe these targeted reductions will enable the company to focus resources in areas providing the greatest benefit in the changing market.

Intel's strategy offers an ever more broad and diverse product portfolio that spans key growth segments. Since August of this year, the company has brought in above 40 new products from the Internet-of-Things to datacenters, with a rising focus on ultra-mobile devices and 2 in 1 systems. With this smart business strategy, Intel has generated strong growth in both top and bottom line over the recent quarter and is likely to post better results in the fourth quarter. At the end of Q3, it has increased top line by 5% while the bottom line is up by 49%, the latter representing solid margin expansion.

This strong growth enables Intel to generate hefty cash flows. In the TTM, its operating cash flows are standing at $20 billion, and capital expenditures at $9.7 billion. Thus, free cash flows are at upwards of $10 billion. Therefore, the company's free cash flows are completely covering its dividends, as they only stand at $4.4 billion. With a quarterly dividend of .2250, its payout ratio is standing at only 48%. Both its free cash flows and payout ratio offer room to increase dividends in coming days. On the other side, Intel stocks looks significantly undervalued, trading at 13.4 times to earnings and 2.2 times to book ratio, while the industry average is at 23.3 and 2.7.

How Xilinx is a Good Stock to Hold

Xilinx designs, develops and markets programmable platforms, including software design tools, integrated circuits and predefined system functions. The company sells its products to global manufacturers of electronic products in end markets including industrial, wireless and wireline communications, scientific and medical, aerospace and defense, automotive, storage and servers, and office automation. Xilinx classifies its product offerings into four categories: Mainstream, New, Base and Support Products.

The company continues to invest in R&D efforts, in areas like new products and more advanced process development, including IP cores and the development of new design and layout software. In the recent quarter, Xilinx increased its research and development spending by 10%. Additionally, it recently acquired technology companies whose products complement its existing product line, and in the past, Xilinx has made a number of strategic investments in other technology companies. In the TTM, its capital expenditures are standing at $34 million, an increase of $4 million over fiscal 2013. Moving forward, the company is seeking to make acquisitions and strategic investments to go hand in hand with its strategy for technology leadership.

With a diversified product portfolio and strategic investments in growth opportunities, Xilinx's revenues of $598.9 million in the Q2 represent a 10% increase over the prior year period. With this strong growth, its cash generating potential is also strong as its free cash flows are covering dividend payments. As a result, the company keeps increasing dividend payments, as in the past five years its dividend growth rate stands at 78%. With hefty cash flows and a payout ratio of 50%, it looks manageable for the company to increase dividends at its current rate. Solid financial performance has enhanced investor confidence, and its stock gained around 164% in the last five years. At the moment, Xilinx looks pricey, trading at 23 times to earnings.

In Conclusion

Despite a volatile economic environment, the global semiconductor industry is heading in the right direction with steady gains this year and stronger growth expected for 2014. Intel Corporation and Xilinx, Inc. both are well set to generate solid growth in 2014. Both companies offering increasing returns and possess the ability to sustain this in the coming days.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.