By Renee O'Farrell
Semiconductor companies are those that create the products that enable the technology that consumers know and love today. Some of the companies in this sector are relatively small, but that doesn't mean that they don't play large roles in modern technology. Nvidia (NVDA) graphics processing units (GPUs) power Lenovo IdeaPads and Dell Streaks. Micron Technology (MU) is the company behind the brands Crucial Technology and Lexar Media. SanDisk Corp (SNDK) is the world's most popular flash memory provider. LSI Corporation (LSI) creates RAID storage.
These are pretty big roles for companies with market caps under $8 billion - and, as such, each represents big opportunity for investors. The companies I just named each have 5-year earnings growth estimates greater than 11%, yet are priced under 14 times their forward earnings. While I think that each company presents a great opportunity, let's take a look at each one separately.
Micron Technology has a $5.57 billion market cap and has a forward price to earnings ratio of 9.22. The company's earnings have fallen by almost 22% a year on average over the last five years, but consensus estimates put Micron's earning growth rate at 11.72% going forward. At $5.63 a share, the company is down 10.57% year to date, but there is every reason to think this company could dominate going forward.
There have been reports that Apple (AAPL) has placed several large chip orders with Elpida Memory, a Japanese company that filed for bankruptcy protection earlier this year. Now, guess who, in early May, won the exclusive right to buy Elpida? That's right - Micron Technology. The price is 200 billion Yen, or $2.5 billion - a bargain, considering. I strongly recommend this company as a buy. George Soros's Soros Fund Management is also on board. The fund had a $760.41 million invested in convertible Micron notes at the end of December after increasing its holding in the company by 56% during the fourth quarter.
SanDisk has a $7.68 billion market cap. Right now, it is trading at $31.52 a share or 10.04 times its forward earnings. Over the past five years, SanDisk's earnings have grown at an impressive 33.30% per year on average. Analysts say the company's earnings should increase at a rate of 15.10% a year on average over the next five years.
At its current share price, SanDisk is down almost 36% year to date after missing analyst estimates regarding its first quarter earnings by 7 cents or 10% (63 cents vs 70 cents) as well as falling short on its revenues ($1.21 billion vs $1.23 billion). But, last quarter David Tepper's Appaloosa initiated a new position in the company and the company says that its numbers should improve considerably in the second half of 2012. I think at this price, with these earnings growth estimates, the company is worth the risk.
LSI Corporation has a $4.09 billion market cap and carries a forward price to earnings ratio of 8.46. Over the past five years, the company's earnings have plummeted an average of 18.58% a year, but analysts are much more optimistic going forward. They predict LSI's earnings will increase at an average rate of 16.38% a year over the next five years.
Right now, the company is trading at $7.19 a share, up 20.84%, which makes its low forward price to earnings ratio even more impressive. LSI's drive technology is licensed by a number of solid state drive (SSD) manufacturers like Intel (INTC). As SSD technology gains more of a foothold, LSI will do even better. Ken Griffin's Citadel Investment Group is a big fan of LSI. The fund increased its position in the company dramatically during the fourth quarter, ending the year with a position worth over $126.80 million. Jim Cramer also recommends this company as a buy, and I agree.
Nvidia is no less impressive. This $7.46 billion market cap company is trading at just over $12 a share, down 12.84% year to date, but its earnings growth is strong. Nvidia's earnings increased by 4.32% a year on average over the last five years, and analysts are expecting that figure to be closer to 13.12% a year on average over the next five years. It looks like Nvidia will probably make it too.
The word is that the company edged out rival Advanced Micro Systems (AMD) to become the new graphics card supplier for Apple's new MacBook Pro and Nvidia has a deal in the works with cloud gaming company Gaikai. Ray Dalio's Bridgewater Associates, Bruce Kovner's Caxton Associates Lp and Louis Navellier's Navellier & Associates each increased their stakes in Nvidia by over 80% during the fourth quarter.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.