The global semiconductor market has grown 4% over the first three quarters of 2013 compared to a year ago, according to World Semiconductor Trades Statistics (WSTS). Guidance for 4Q 2013 revenue remains quite soft for key semiconductor companies. Thus, full year 2013 growth is expected at 5% to 6%. However, increased investment in capital equipment is an encouraging sign for the Semiconductor industry in the coming year. In a recent report, Gartner predicts that increased investment in capital equipment will spur growth to be very strong in this industry over the next two years.
The Semiconductor Industry serves as a growth driver and an indicator of technological progress. We are heavily dependent on technological developments in this industry, as PCs, cars, phones, and movies, etc., all use semiconductor devices. In this article, I explore two key semiconductor companies that have grown their business models and their access to all major markets with strong product diversification and innovations. Consequently, these two companies are able to generate massive sales and earnings each year. They are also returning considerable cash to shareholders both in the form of dividends and capital gains. These are Microchip Technology (NASDAQ:MCHP) and Texas Instruments (NYSE:TXN).
How Microchip is a Good Stock to Hold
Microchip Technology is a leading provider of mixed-signal, microcontroller, analog and Flash-IP solutions, providing lower total system cost, faster time to market, and low-risk product development for thousands of diverse customer applications worldwide. Headquartered in Chandler, Arizona, the company markets products globally through a network of distributors and direct sales personnel. The company's manufacturing operations include wafer fabrication, wafer probe and assembly, and test. With the ownership of a significant portion of manufacturing resources, the company maintains a high level of manufacturing control, which results in the lowest input cost.
Microchip Technology continues to invest in new and enhanced products, including development systems, as well as in design and manufacturing process technologies. The company is looking to make capital expenditures of $115 million in 2014 in order to enhance the equipment needed to support the growth of its new products and technologies. With a solid business model and smart investment strategy, it has been generating increasing revenues and earnings year over year.
In the highly competitive environment, Microchip's revenue growth is very high at 18% in the past three years, while the industry average is only at 12.9%. The company has demonstrated this trend again in the recent quarter by setting a record sale of $492.7 million, an increase of 6.5% sequentially and 28.5% from the year ago quarter. Its microcontrollers grew 22.9%, licensing grew 23.4% and analog grew 25.2%, all setting new revenue records. Also, Microchip's microcontroller and analog businesses recently achieved a better business model through SMSC acquisition, enhancing operating profit to 31.8% in the recent quarter.
The company has been successfully translating strong growth in revenues and earnings into cash. Its operating cash flows increased from $396 million in 2012 to $573 million over the past twelve months. Its free cash flows are also covering dividend payments, which only stand at $278 million, while free cash flows are at $493 million. At the moment, Microchip offers a quarterly dividend of $0.3545/share, and this is the thirty-ninth dividend increase since it initiated dividend payments in 2003. This strong financial performance also translates to huge capital gains in the form of price appreciation, as in the past five years, its shares gained around 126%. I strongly believe that, with its established and diversified business model and smart strategy, Microchip will continue to impress investors.
How Texas Instruments is a Good Stock to Hold
Texas Instruments designs and produces semiconductors that it then sells to electronics designers and manufacturers all over the globe. The company began operations all the way back in 1930 and was ranked as the globe's fourth largest semiconductor company in 2012 as calculated by revenue. Headquartered in Dallas, Texas, the company has design, manufacturing or sales operations in over 35 countries. Texas Instruments operates with three segments: Analog, Embedded Processing and Other. The company expects Analog and Embedded Processing to be its primary growth engines in the coming years, and therefore focus its resources on these segments.
The company's third-quarter results reflect the positive structural changes it has made over the past few years by focusing on Analog and Embedded Processing. Its revenue in the recent quarter was up 6% sequentially. Apart from its legacy wireless products, revenue grew 10% sequentially. Analog and Embedded Processing now account for 80% of the company's revenue, eight points more than the past year numbers. On top of this, the company has been generating strong bottom line growth driven by better revenue and gross profit, tight expense control and discrete tax items. With the recent restructuring, the company's gross margin of 54.8% was an all-time high, exceeding the prior record set in Q3 of 2010. This strong growth reflects the increased quality of revenue that comes from focusing on Analog and Embedded Processing and the efficiency of its manufacturing strategy.
The business model adopted by Texas Instruments continues to generate strong cash flow from operations. In the TTM, free cash flow was at almost $3 billion, up 4% when compared with a year ago. Free cash flow is around 24% of revenue, steadily in line with its long-term target of 20-25%. In contrast to free cash flow, dividend payments are at only $1 billion in the past twelve months, and the company is consistently making increases to its dividends. Still, its free cash flows are providing cover to dividend payments. It has raised dividends by an astonishing 172% in the past five years and, in the past twelve months, has raised dividends from 0.21/share to 0.30/share, an increase of 42% in a single year. Most assuredly, investors are enjoying this company's solid performance as its stock gained around 45.33% in the last year alone. Forward P/E of 19.7 suggests more upside potential. With its increased focus on Analog and Embedded Processing, the restructured Texas Instruments looks safe.
With steady gains in semiconductor sales this year and stronger growth expected for 2014, the global semiconductor industry is heading in the right direction, despite a stubbornly slow macroeconomic environment. Texas Instruments and Microchip technology are both well set to generate solid growth in 2014.
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.