Goldman Sachs published a report entitled "Americas: Technology: Semiconductors" on January 2, 2012. The report isn't publicly available but we will summarize its main points. In the report, James Covello, James Schneider, Mark Delaney, and Gabriela Borges suggest that the semiconductor sector is expected to perform better than the semi production equipment sector. Semiconductor shipments are currently below trend and fundamentals are likely to improve in the second quarter of 2012. Orders for semi production equipment, on the other hand, are likely to decline by mid-2012. In this article we will focus on Goldman Sachs' least favorite stocks in this industry.
Intel (INTC) designs, manufactures, and sells integrated circuits for the computing and communications industries. It has been given a sell rating by Goldman Sachs. Due to its rising inventory in 2012, margins are likely to be under pressure throughout the year. Historical trends show that five out of six times, the gross margins for Intel have declined following a rise in capital expenditure in the previous year. Intel is seen as a cyclical stock by Goldman Sachs and it will have to deal with inventory corrections and margin pressures in 2012. Shares of the company are currently trading at $25.8 per share and are expected to go south of $22 by the end of 2012. This is based on 10x the normalized earnings per share of $2.20. Ray Dalio's Bridgewater Associates sold its entire stake in INTC during the third quarter.
Advanced Micro Devices (AMD) operates as a semiconductor company. It has been given a sell rating by Goldman Sachs, which believes that the company will face fundamental challenges that will be difficult to fix. Problems with its partner GlobalFoundries are resulting in delays in the company's products. Also, the entrance of Qualcomm (QCOM) into the PC market will impact it negatively. NVIDIA (NVDA) is a competitor, which reported a quarterly revenue growth of 26.3% versus the 4.4% growth reported by Advanced Micro Devices. NVIDIA also reported an operating margin of 17% versus the company's 6.6%. Shares of AMD are currently trading at $5.8 per share and are expected to go south of $4.5. This price expectation is based on 5x its 2012 enterprise value to EBITDA ratio. Ivory Capital sold its entire stake in AMD during the third quarter.
Microchip (MCHP) designs, develops, manufactures and markets semiconductor products for embedded control applications. Goldman Sachs has given it a sell rating because it is of the opinion that the 25% valuation premium to Microchip's stock is unwarranted. Historically, this premium was justified due to the higher share gains and dividend yields relative to the group. Goldman Sachs believes that the recovery in sales for Microchip is going to be lower than its peers and investors will move to other stocks that offer lower dividends at more reasonable valuations. Shares of the company are currently trading at $35.8 per share and are expected to go south of $30 by the end of 2012. The target price is based on 14x the normalized earnings per share of $2.15.
Intersil (ISIL) engages in the design, development, manufacture, and marketing of analog and mixed-signal integrated circuits. Goldman Sachs has given it a sell rating because Intersil's structural challenges are expected to result in an underperformance of stock in 2012. Over the last three years, Intersil's sales and earnings growth have been lower than its peers. A combination of market share erosion and pricing pressures are likely to value the stock downward later this year. Maxim Integrated Products (MXIM) is a competitor of Intersil and it is generating higher gross and operating margins than Intersil. Maxim also reported a quarterly revenue growth of 1.6% versus Intersil's negative 14.8%. Shares of Intersil are currently trading at $10.8 per share and are expected to fall to a price target of $9. The price target is based on 11x the normalized earnings per share of $0.85.
KLA-Tencor (KLAC) is a designer, manufacturer, and marketer of process control and yield management solutions for the semiconductor industry. Despite KLA-Tencor being a leading equipment company, it has been given a sell rating by Goldman Sachs due to an expected downside in orders this year. The company also has little exposure to the NAND market where Goldman Sachs has a more positive outlook. If the Street estimates were cut and orders approached a trough, Goldman Sachs may become positive on the stock. Shares of the company are currently trading at $49.3 per share and are expected to go south of $35, based on 10x the normalized earnings per share of $2.75. Jeffrey Vinik's Vinik Asset Management sold its entire $56 million position in KLAC during the third quarter.