Below are our picks for the top three companies in the semiconductor industry. We’ve used our proprietary value screening tools to identify the best stocks in the industry according to valuation as well as fundamentals.
The global semiconductor market was hit particularly hard by the economic downturn with consumers holding back on purchasing electronic equipment and vehicles.
In the short-term, worldwide semiconductor revenue for 2011 has slowed and is expected to reach U.S. $299 billion, a drop of 0.1% compared with 2010. This can be attributed to excess inventory, manufacturing over-capacity and slowing demand due to economic weakness. (source)
This is concerning but, if you’re not too worried about a double-dip recession and uncertain global macroeconomic conditions then here are three stocks that are undervalued and show strong fundamentals.
We take a look at 10 years of fundamental data and grade them according to valuation and overall financial health. These stocks are undervalued according to their growth price (FCF) with a 15% discount rate.
Click the report at the bottom of each stock analysis to dive deeper into the stock’s valuation and financial data where we chart the fundamental trends for each of them.
Tessera Technologies, Inc. (NASDAQ:TSRA)
Tessera Technologies develops, licenses and delivers miniaturization technologies and products for electronic devices worldwide. Its micro-electronics section offers semi-conductor packaging technologies encompassing interconnect and substrates and thermal management technology.
- Management of cash has been spectacular since 2002. Cash return on invested capital has been 43.13% in 2010 while positive free cash flow has gained year on year with 96.30m in 2010.
- Healthy financial strength with a very strong balance sheet (TL-to-TA 0.07) and consistent reinvestment of profits with 31.79% retained earnings growth last fiscal year. Click to enlarge
- Tessra Technologies provided financial guidance for the third quarter ending Sept. 30, 2011. Total revenues are expected to be approximately $60 million, which declined compared to second quarter 2011 total revenue of $70.7 million. (source)
- Return on equity has been steadily declining since 2006, reaching 8.63% in 2010.
Undervalued by: 155.24%
Vuru Grade: 89.07/100
See our full report on TSRA’s fundamentals and valuation here.
Applied Materials Inc. (NASDAQ:AMAT)
Applied Materials provides manufacturing equipment, services and software to the semiconductor, flat panel display, solar photovoltaic and related industries worldwide. Its Silicon Systems Group offers a range of manufacturing equipment used to fabricate semiconductor chips or integrated circuits.
Analysts’ outlook on AMAT remains mixed as Goldman Sachs downgraded it to a sell rating with a $10.50 target. Meanwhile, analysts at Oppenheimer upgraded shares from a “perform” to an “outperform” rating last Thursday with a $16.00 price target. (source)
- Applied Materials announced its quarterly results on Wednesday, August 24, reporting a $0.35 EPS, which beat Thomson Reuters consensus estimate of $0.33 EPS.
- Reducing capital intensity where capital expenditure ratio has decreased to 18.03%.
- Consistent dividends since 2005 with a current dividend yield of 2.67%.
- Net profit margins have been declining since 2008 where it reached 9.82% in 2010. Compare this to the net profit margins in 2004 to 2007 where it has hovered around 17%. Click to enlarge
Undervalued by: 41.99%
Vuru Grade: 84.24/100
See our full report on AMAT’s fundamentals and valuation here.
Supertex, Inc. (NASDAQ:SUPX)
Supertex develops, manufactures and markets high voltage analog and mixed signal integrated circuits primarily in Asia, the U.S. and Europe. The company offers high voltage analog multiplexer switches as well as high voltage amplifier ICs to drive optical micro-electro-mechanical systems for the telecommunications market for use in optical switching applications.
Supertex recently introduced the MD2134, a high-speed source driver to be used in a pulsed current waveform generator for medical ultrasound imaging machines. This compliments its existing products and is optimized for delivering high-resolution images in high performance and low power ultrasound machines. (source)
- Healthy economic moat with competitive advantage, pricing power and capital intensity improving over the years. Net profit margins at 14.77% in the last fiscal year. Also, strong pricing power with gross margins at 54.33%.
- Very strong balance sheet (TL-to-TA 0.13) and a strong retained earnings growth at 6.29%.
Undervalued by: 33.72%
Vuru Grade: 83.25/100
See our full report on SUPX’s fundamentals and valuation here.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.