UBS Investment Research published a report titled "Global Tech Daily" on January 18th, 2012. James F. Hillier's report lists a number of stocks from the Semiconductor, IT, Electrical, Specialty Chemical, and Entertainment sectors. The report isn't available online but we will discuss the U.S. stocks mentioned in UBS' report. None of the stocks mentioned have been given a sell rating by UBS Investment Research.
Linear Technology (LLTC)
It has been given a buy rating by UBS Investment Research due to its improved orders since December, 2011. UBS analysts are of the opinion that the lean channel inventories and robust industrial business seasonality will provide excellent growth opportunities for the company. With OEMs likely to restock their inventories, UBS expects Linear's rising inventory to fall by the second half of 2012. Shares of the company are currently trading at $33 per share and are expected to reach a target price of $35.
In our opinion, Linear's relatively low beta of 0.85 and its high dividend yield of 2.9%, indicate that the stock is in a good position to reward its investors. This rating is strengthened by Linear's gross margin of 78% and operating margin of 51%, both of which are significantly higher than the industry averages of 44% and 0.02% respectively. Additionally, the company has quite a high profit margin of 39%. Our rating for Linear Technology is a buy.
Cree (CREE) is a manufacturer of light emitting diodes and other semiconductor products. It has been given a neutral rating by UBS Investment Research. The company is currently facing pressures in pricing of its LED products, resulting in a lower gross margin of 37.5%. Cree is able to utilize its current capacity to increase production and has, therefore, decided to lower its capital expenditure to $78 million. UBS is of the opinion that Cree's lighting products are likely to benefit from a seasonal change and its shares will benefit in the longer term. Shares of Cree are currently trading at $27 per share and are expected to reach a price target of $25.
In our opinion, Cree's low operating margin of 6.7% and a price-to-earnings ratio of 47.8x, that is more than four times greater than the industry average of 10.7x, indicate that it is overpriced. The company has been missing on revenues and earnings per share and is poorly performing on other fronts. We recommend selling Cree as there are better opportunities in the market.
Skyworks Solutions (SWKS) is a producer of analog and mixed signal semiconductors. It has been given a buy rating by UBS Investment Research. The company is expected to work with Samsung (SSNLF.PK), HTC (HTCXF.PK), and ZTE (ZTCOF.PK) on Qualcomm (QCOM) reference designs for 3G. Thus, UBS believes that Skyworks Solutions will greatly benefit from its partnership due to the increase in demand for 4G and LTE. Shares of the company are currently trading around $21 per share and are expected to reach a price target of $28, indicating a potential upside of 33%.
We are bullish about Skyworks Solutions. The rising trend observed for revenues and earnings per share indicate improved performance over the last quarter. Skyworks has generated a higher operating margin of 21%, as compared to the industry average of 7%. Its five year, expected price-to-earnings-to-growth ratio of 0.7x was also lower than the industry average of 0.9x, which is a good sign for the company. Its increased market share in mobile internet applications is set to go hand-in-hand with the high demand for LTE phones in 2012.
ADTRAN, Inc. (ADTN) is a provider of network access solutions. It has been given a buy rating by UBS Investment Research. Analysts are of the opinion that the company's broadband access has exceeded expectations, although its optical branch is performing weakly. Also, earnings per share of the company have met expected estimations. Shares of ADTRAN are currently trading at $34 per share and are expected to reach a price target of $40.
We are bullish about ADTRAN. ADTRAN's gross margin of 58% and operating margin of 26% are significantly higher than the industry averages of 37% and 3%, respectively. Also, the company has a profit margin of 19%, a return on equity of 22% and a dividend yield of 1.1%, which are favorable statistics for investors. With an expected acquisition of a fixed-line broadband access business next year, share price is likely to rise in the future which is why we recommend buying the stock at the moment.
Check Point Software (CHKP) is a developer of software and hardware products for the information technology industry. It has been given a buy rating by UBS Investment Research. The increase in 'blade adoption' and an 'appliance refresh' are driving the current metric billings of the company. According to UBS, European demand differed between regions. Shares of the company are currently trading at $54.7 per share and are expected to reach a target price of $68, indicating a potential upside of 24%.
We are bullish about CHKP. Revenue increased by more than 12% in the fourth quarter of 2011. The company's gross margin of 88% and operating margin of 51% are significantly higher than the industry averages of 61% and 8% respectively. Check Point Software has a beta of 0.56 which shows that the stock is not volatile. Recently, there has been an increase in cyber-attacks, which is good news for a security company like Check Point Software as this would lead to an increase in demand for its products. The positive valuations and a potential increase in demand is why I recommend buying this stock.
Cognizant Corporation (CTSH) is a consulting firm in the information technology sector that also provides outsourcing activities. It has been given a buy rating by UBS Investment Research. Analysts expect Cognizant's revenue to grow by 22.6% in the year 2012. With no project cancellations and healthy signings in sight, Cognizant is heading towards stability over the year. Shares of the company are currently trading around $70 per share and are expected to reach a price target of $87, indicating a potential upside of 24%.
We are bullish about Cognizant. The company's operating margin of 18.6% is significantly higher than the industry average of 4.3%. Its price-to-equity ratio of 25.7x is similar to the industry average of 24.8x. Also, Cognizant's multimillion dollar agreement with INTTRA is going to have a positive effect on the company's valuations, which is why we believe that the company's buy rating is justified.
Take-Two Interactive (TTWO) is a publisher of entertainment software. It has been given a neutral rating by UBS Investment Research. The company is set to release Max Payne 3 by May, 2012 which is expected to be quite a hit. UBS is also revising its earnings per share estimates for 2013 due to the start of production of Grand Theft Auto 5, which is one of the biggest franchises in the industry. Other games in the company's pipeline, such as Bioshock and Borderlands 2, are also slated for a release in the near future. Shares of the company are currently trading at $15 per share and are expected to reach a target price of $14.5, by the end of 2012.
We are neutral about TTWO. The company is currently experiencing negative earnings per share of $0.47 and a negative operating margin of 2%. While the company's financials do not look so good, the release of Max Payne 3 in May is likely to increase share price due to the success of its predecessor games. Another positive point about Take-Two is Carl Icahn's $100 million position in the stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.