3 Semiconductor Companies To Consider, 2 To Avoid

by: Vatalyst

Semiconductor companies can be a somewhat risky investments. That's because the industry changes rapidly. What can be state of the art one month can be old news the next. The engineering challenges faced by semiconductor companies are real. Competitive pressure to get more efficient forces companies to chop up business units and outsource. But the rewards this industry can bring keep investors coming back. Success stories like Broadcom (BRCM) and KLA Tencor (NASDAQ:KLAC) exhibit how a few savvy engineers can turn the industry on its head and make investors rich. That being said, I believe the semiconductor market looks likely to improve in the short-term.

However, not all semiconductor companies are created equally. I decided to take a look at the following five semiconductors to give investors a broad idea of what the competitive landscape looks like. In this article, I look at Altera Corporation (NASDAQ:ALTR), Lattice Semiconductor Corporation (NASDAQ:LSCC), NXP Semiconductors NV (NASDAQ:NXPI), Texas Instruments Incorporated (NYSE:TXN) and Xilinx Inc (NASDAQ:XLNX), to see if they are good investments. These companies range in size and profitability. By examining this broad group, investors will get a sense of how a swath of the industry is doing. This will help investors make more informed decisions regarding investment in the sector. Please use my research as a starting point for generating your own opinions on the semiconductor industry.

Altera Corporation: Altera Corp specializes in the design, manufacturing, and marketing of programmable logic devices and application-specific integrated circuit devices. This $12.75 billion company produces products for the Americas, Asia, Europe, the Middle East, Africa, and Japan. Altera pays a dividend of $0.32 for a yield of 0.8%.

Last year was not kind to Altera. The share price dropped 0.4% over the 12-month period, its quarterly revenue declined by 17.6% and its earnings tumbled 36.7%. The stock is overpriced (with a price to book of 4.31), and its price to earnings ratio is somewhat high at 17. Although it enjoyed a 29% return on equity, and the company is flush with cash (total cash of $3.44 billion), there are better investments among the group. I recommend holding Altera Corporation at this time, but would not take any new positions in the stock.

Lattice Semiconductor Corporation: Unlike Altera, Lattice Semiconductor posted a very strong 2011. The Hillsboro, OR company develops, manufactures, and markets field programmable gate arrays and related software. With a market capitalization of $750 million, the company has shipped more than 20 million programmable mixed signal devices to customers worldwide.

Lattice got a boost in share price when it recently announced that it met analyst expectations for revenue and exceeded for earnings. The quarterly revenue did drop 4% as expected, but earnings soared nearly 200%. The debt-free company is now sitting on more than $200 million in total cash, a comfortable amount for a non-dividend payer. After a 7% rise in share price over the past 12 months, the big expected jump makes Lattice a very intriguing option going forward. I recommend buying shares of Lattice Semiconductor at this time.

NXP Semiconductors NV is a Dutch company that specializes in providing semiconductors and mixed signal solutions to customers primarily in Japan, Europe, South Korea and the Americas. The $6 billion company, known as a leader in the near-field communication used by the smartphone industry, is attempting to establish itself and reverse its mounting losses. The company's stock is currently trading at $24.25 per share (with a 52-week range of $13.06 - $35.32), down 14% over the past 12 months.

NXP is looking to combine its expertise related to the cellular industry with its corporate marketing. The company recently released its product catalog on the Windows Phone, allowing customers access to its latest products and support. While this is certainly an attention grabbing idea, the concern with the company revolves around its high price to book ratio of 5.49 and its debt to equity ratio, which stands at an oppressive 280. The company has potential, but its weak performance and increasing competition in the near-field communications sector have me worried. I recommend holding NXP Semiconductors at this time, but would not take any new positions in the stock.

Texas Instruments Incorporated Probably the most famous brand in the semiconductor business, Texas Instruments Inc is a $38 billion manufacturer of components for the communications, computing, industrial, consumer electronics, automotive, and education sectors. The stock has a one-year target of $35.50, which is about 7% above its going rate. Texas Instruments pays a dividend of $0.68, with works out to a yield of 2%. With the short-term market for semiconductors improving, the Dallas-based firm looks to cash in and add to its solid market position. Although its share price dropped (down 6% for TTM), and both its quarterly revenue and earnings dipped (down 3% and 68.4%, respectively), there are indications that Texas Instruments is still a good buy. The company's price to earnings ratio is a reasonable 13.4, and its debt to equity ratio is 51, and one of the company directors recently purchased 1,000 shares of stock, a $34,000 transaction which signals that things may be improving. With its reputation, growth and dividend, Texas Instruments is still a solid investment opportunity that could get even better as demand increases.

Xilinx Inc

In spite of being down a bit last year, Xilinx Inc is another company that I like for its potential. This San Jose, CA-based firm designs, develops, and markets programmable platforms for the cellular, scientific and medical, aerospace and defense, broadcast, automotive, and data processing sectors. The company has a market cap of nearly $10 billion; its stock is trading near $37, and it has a one-year range of $26.55 - $37.48. The target forecast is $39, and the company pays a $0.76 annual dividend, which amounts to a 2% yield.

This stock is attractive for its yield, its low payout ratio (currently at 35%) and its current ratio of 6.15. Although its quarterly revenue was down almost 10% and its earnings nearly 17%, the company is protected by its standing in the 3G and 4G communications markets and its ability to generate free cash flow (2011 marked the 8th consecutive year to do so). Although predictions are modest for 2012, the company is projected to grow its share price and the presence of its dividend makes it a reasonable stock to buy on a pullback.

Tech Stocks with Potential

While the semiconductor industry has seen its tough times, there are still excellent investments here. While I have Altera Corporation and NXP Semiconductors NV as holds at the current time, I see Lattice Semiconductor Corporation, Texas Instruments Incorporated and Xilinx Inc as good buys. These companies have solid financials and good economic moats to help them grow. As the industry makes its expected recovery, look for these three to benefit, and make sure to acquire them for gains.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.