3 Downtrodden Semiconductor Stocks With a Potential Upside of 25%

by: Bret Jensen

Semiconductor stocks have had a significant selloff over the last three months. Here are three that have sold off 20% or more, sport low valuations, and have significant net cash on the balance sheet and/or insider buying. They are also 25% or more under analysts’ price targets.

MEMC Electronic Materials (WFR) - MEMC Electronic Materials, Inc. engages in the development, manufacture, and sale of silicon wafers for the semiconductor industry worldwide. Its wafers are used as the starting material for the manufacture of various types of semiconductor devices, including microprocessor, memory, logic, and power devices. The company operates in three segments: Semiconductor Materials, Solar Materials, and Solar Energy. The Semiconductor Materials segment offers prime polished wafers, such as OPTIA and annealed products; epitaxial wafers consisting of thin silicon layer grown on the polished surface of the wafer; test/monitor wafers for testing semiconductor fabrication lines and processes; and silicon-on-insulator wafers used in the chip making process.

Valuation and Price Targets – WFR is selling at under 10 times this year’s earnings but around 7 times next year’s consensus EPS. WFR sells at less than 1 times trailing revenues and a .65 PEG. It has had net insider buying over the last 180 days. WFR is selling at the bottom of its five valuation range based on P/E, P/B, P/S, and P/CF. MEMC Electronics is selling at $10.30 a share. Price targets are $15.50 at Credit Suisse, $16 at Wunderlich and $14 at S&P.

KLA – Tencor Corporation (NASDAQ:KLAC) - KLA-Tencor Corporation engages in the design, manufacture, and marketing of process control and yield management solutions for the semiconductor and related nanoelectronics industries. It offers equipment comprising wafer and integrated circuit (IC) defect monitoring, review, and classification; reticle defect inspection and metrology; packaging and interconnect inspection; critical dimension metrology; pattern overlay metrology; film thickness, surface topography, and composition measurements; measurement of in-chamber process conditions, wafer shape, and stress metrology; computational lithography tools; and yield and fab-wide data management and analysis systems.

Valuation and Price Targets – KLAC sells for under 9 times this year’s and 2012’s projected earnings and for .9 its expected PEG. It has approximately $7 a share in net cash. It has significantly beat earnings estimates in each of the last four quarters. It has a dividend yield of 2.3%. KLA Tencor sells for $41.20. Price targets are $52 at Credit Suisse and $53 at S&P.

Marvell Technology Group (NASDAQ:MRVL) - Marvell Technology Group Ltd. designs, develops, and markets analog, mixed-signal, and digital signal processing and embedded microprocessor integrated circuits. The company offers storage products, including storage system-on-a-chip, read channel, hard disk controller, tape drive controllers, solid-state drive controllers, and storage-system products for hard disk drives, tape drive electronics, optical disk drives, solid-state flash drives, and storage subsystems technology; and switching products comprising Prestera switch family, Link Street multi-port integrated switch family, and Link Street gateway products. It also provides communications controller and embedded processor products, such as Discovery Innovation, Discovery system controllers, Horizon WAN communication controllers, Kirkwood embedded processor, and Orion embedded processor; and enterprise transceiver and PC connectivity products consisting of Alaska and Alaska X 10 Gigabit Ethernet transceiver families, Fast Ethernet transceiver family, and Yukon Gigabit Ethernet PC connectivity products.

Valuation and Price Targets – MRVL sells at around 7 times this year’s PE and 6 times 2012’s projected earnings, once you take out its $4.50 a share in net cash. Marvell has had net insider buying over the last six months. It sells for approximately eight times its last fiscal year’s operating cash flow. MRVL is selling at the bottom of its five valuation range based on P/E, P/B, P/S, and P/CF. MRVL sells for $14.34. Price targets are $23 at Susquehanna, $24 at Citigroup and Credit Suisse has a price target of $22 on Marvell.

Disclosure: I am long WFR.