Recently, UBS has published a report on the outlook for the semiconductor industry in 2012. The report isn't publicly available but we will try to summarize it in as much detail as we can. UBS maintains a positive outlook for 2012 because companies will have healthy cash balances they can use to actively repurchase stocks. The floods in Thailand have adversely affected the semiconductor industry but the under-shipment and bottoming process will likely be completed by the end of 2011, signalling a fresh start for 2012.
The average selling price trends are projected to remain stumpy in 2012 with share repurchases and dividends being the main non-operating uses of cash. A positive product cycle and technology trend will be seen in the upcoming year. The semiconductor industry is expected to grow; aided especially by the mid-year OEM inventory restocking. The inventory restocking will also help support an in-line growth even under adverse conditions.
There are a lot of positive catalysts in the semiconductor industry for 2012. Solid State Disks (SSDs) will play a greater role in NAND flash demand for 2012. SanDisk (SNDK) will obviously benefit since it is the largest producer of NAND flash drives. A trend toward quad-core processors will benefit Qualcomm, (QCOM), NVIDIA (NVDA), Apple (AAPL) and Samsung while the expected success of cloud-enabling technologies will foresee an increase in revenue for Broadcom and Intel.
Now let us take a look at UBS’ most preferred semiconductor companies for 2012.
Broadcom Corporation (BRCM) is a highly diversified company best known for its mobile and wireless products. One of its well-known customers, Apple, contributed to 11% of the sales in 2010. UBS believes that the growth in smartphones and 3G CDMA revenue of Broadcom products will greatly reward investors in 2012. Currently, the stock is trading at $30.17 and is expected to go north of $45. Its current market capitalization is $15.8 billion and Broadcom’s earnings are in the black, $1.66. A relatively high P/E ratio of 17.06x shows that it is greatly valued by investors.
Intel (INTC), a world leader in semiconductor chip manufacturing, has shown tremendous growth in 2011 with the successful introduction of its Sandy Bridge processor line. Intel’s third-quarter results for 2011 were far ahead of estimates and this solid growth is expected to continue to 2012. Intel’s stock is currently valued at $23.46 per share and is expected to go north of $30 per share. Intel has the largest market capitalization in the semiconductor industry, valued at $118.1 billion. Intel has an EPS of $2.31 which is expected to grow by double digits next year. Billionaire Jim Simons had $200 million invested in Intel at the end of September.
Qualcomm (QCOM) is one of the largest designers and suppliers of semiconductor chips, ranging from CDMA chipsets to network base stations and modems. UBS believes that Qualcomm is best positioned for 2012 due to an increase in the usage of smartphones and tablets. Not only that, Qualcomm generates a solid royalty stream, which is expected to increase in 2012. Its shares are currently trading at $53.94 and are expected to go north of $70. Qualcomm has the second largest market capitalization, amongst UBS’ most preferred stocks, valued at $85.1 billion. Qualcomm’s earnings per share are the second highest in UBS’ most preferred list at $2.71 and a P/E ratio of 20x shows its worth to investors. Qualcomm is one of the 10 most popular stocks among hedge funds (see the complete list here).
SanDisk Corporation (SNDK) is the leading manufacturer of flash memory cards. The highly successful embedded NAND products will continue to generate more revenue in 2012 as well as having lower costs. The share price is currently valued at $47.74 and is expected to reach a targeted share price of $62. SanDisk has a relatively lower market capitalization of $10.9 billion. SanDisk has the highest earnings per share of $4.91 in UBS’ most preferred list but has a relatively lower P/E ratio at 10.28x.
The least preferred stocks for 2012 are listed below:
Intersil (ISIL) is a manufacturer of Analog and mixed-signal semiconductors. It is currently trading at a share price of $10.27, which is expected to remain south of $11 due to limited catalysts for the year 2012. It has a market capitalization of $1.2 billion.
Sigma Designs (SIGM), responsible for designing and building high performance system-on-a-chip semiconductors, has the lowest relative market capitalization of all the mentioned semiconductor companies in the UBS report (valued at a mere $0.2 billion). The current market price per share of $6.84 is targeted to remain south of $8.5. Sigma Designs faces tough competition as well as a challenge of penetrating emerging technologies in the upcoming year.
Xilinx (XLNX) is a semiconductor company that supplies programmable logic devices. UBS views the US fiscal budget constraints and fierce competition from other companies as negative factors for Xilinx. With a share price of $30.74, which is expected to remain below $32, UBS is neutral on the stock. Alkeon Capital has the largest stake in XLNX among the 350 hedge funds we track.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.