Which Is Best: Intel, Xilinx Or Microchip Technology?

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 |  Includes: INTC, IYW, MCHP, ROM, TDIV, TECL, VGT, XLK, XLNX
by: Alpha 7 Trading

The rising demand for longer battery life and faster performance for PCs and mobile devices has motivated speedy innovation and changes 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 for the industry hovers at 4 to 5%. Nevertheless, in a recent report, Gartner predicts that increased investment in capital equipment will spur growth to be quite strong in this industry over the next two years. In this article, I explore three key semiconductor companies that have grown their business models and have access to all major markets with strong product diversification and innovations. These companies are able to generate massive sales and earnings each year. They are also returning significant cash to shareholders both in the form of dividends and capital gains. These are Intel Corporation (NASDAQ:INTC), Microchip Technology (NASDAQ:MCHP), and Xilinx, Inc (NASDAQ:XLNX).

The Reason 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 a foundation for the globe's 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 for an aggregate net cash count of $882 million. Its recent acquisition of Stonesoft Corporation will expand its network security solutions, particularly those that address 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].

Intel's strategy offers an ever broader and more diverse product portfolio that spans several key growth segments. Since August of this year, the company has brought in more than 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 numbers for the second half of 2013 and is likely to post better results in the current year. At the end of fiscal 2013, the company's top line growth was in the negative by 1% due to the fact that PCCG experienced decreased platform unit sales in the first half of 2013. It should be noted that the company observed offsetting growth in the remainder of the year as the PC market started to show indicators of stabilization. However, higher factory start-up costs for its next-generation 14nm process technology reduced the company's gross margin over 2012. In in the third quarter of 2013, the company announced restructuring measures including targeted worker reductions as well as the exit of certain businesses and facilities, including its 200mm wafer fabrication facility in Massachusetts. I believe these targeted reductions has given the company the ability to focus resources in areas providing the greatest benefits in the changing market.

The mild growth in both top and bottom line has not hindered Intel's cash generating ability. In the fiscal year 2013, its operating cash flows stand at $20.1 billion, and capital expenditures are at $9.8 billion. Thus, free cash flows are at upwards of around $11 billion. The company's free cash flows completely cover its dividends payments and buy backs, as these only stand at $4.4 billion. With a quarterly dividend of $.2250/share, Intel's payout ratio stands at only 48%. Both Intel's free cash flows and payout ratio offer room for increased dividends in coming days. On the other side of the coin, Intel stocks look significantly undervalued, trading at 13.3 times-to-earnings and 2.2 times-to-book ratios, while the industry average is at 23.3 and 2.7 respectively. Looking forward to 2014, the company expects revenues and its gross margin to continue to be flat. Though INTC is trading at attractive multiples, I do not recommend initiating a position in the company during flat growth. I think this will hinder its stock price growth even though company will keep paying its dividends.

Why 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, and 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 past quarter, its capital expenditures were standing at $11 million, an increase of $3 million over the previous quarter in 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 $587 million in the third quarter represent a 15% 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 equals 78%. Recently, the company announced an increase in dividends from $0.25/share to $0.29/share. 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 this stock has gained around 170.8% in the last five years. At the moment, Xilinx looks pricey, trading at 23 times-to-earnings. Nevertheless, holding a stock can be good idea for investors as the company is may generate big profits in the coming days with its aggressive investment strategy.

Why 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 testing. 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% over 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 sale of $482.4 million, an increase of 15% from the corresponding quarter one year ago, reflecting continued market share gains in its strategic product lines. Its microcontrollers grew 17.8% and analog grew 16%. Also, Microchip's microcontroller and analog businesses recently achieved a better business model through SMSC acquisition, enhancing operating profit to 31.9% 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 $588 million over the past twelve months. Its free cash flows are also covering dividend payments, which only stand at $280 million, while free cash flows are at $494 million. At the moment, Microchip offers a quarterly dividend of $0.3545/share, and has paid dividends consistently since it initiated dividend payments. 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 129.9%. I strongly believe that, with its established and diversified business model and smart strategy, Microchip will continue to impress investors.

In Conclusion

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. Xilinx and Microchip Technology are both well set to generate solid growth in 2014. On the other hand, Intel looks a bit slow in the way it is responding in the current environment. Its revenue growth has gained momentum over the past two quarters; however, the growth is still slow compared to the other two companies. Intel may have the potential to keep paying dividends and work on buy backs, but I am not expecting solid gains in price appreciation.

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.