Comparing America's 3 Largest Integrated Circuits Semiconductor Companies

Includes: ADI, AVGO, XLNX
by: Joseph Cafariello

The Integrated Circuits Semiconductor industry is expected to outperform the S&P broader market significantly in the current quarter, next quarter, 2015 and beyond.

Mean/high targets for the 3 largest U.S. Integrated Circuits Semiconductor companies – Broadcom, Analog Devices and Xilinx - range from 17% to 45% above current prices.

Find out which among Broadcom, Analog and Xilinx offers the best stock performance and investment value.

* All data are as of the close of Monday, October 20, 2014.

The semiconductor segment of the market is quite diverse, with companies organized into five main industries: broad line, integrated circuits, specialized, equipment & materials, and memory chips. Here we'll be comparing the three largest U.S. integrated circuits semiconductor companies, which are defined as:

Companies [that] design, manufacture, and sell processors for industrial use as well as parts for consumer and business devices. These companies are generally structured as corporations but are often ADRs (American Depository Receipts) as well, which means they are foreign corporations traded in the United States. Integrated circuit makers tend to offer below-average dividend yields.

Over the past 5.5 years since the beginning of the economic recovery, the semiconductor space has kept pace with the broader market S&P and even outperformed it at times, as noted in the graph below. Where the S&P is up 180% since March of 2009, the most heavily traded semiconductor fund - Market Vectors Semiconductor ETF (NYSE: SMH) [blue] - is up 195%.

Over this same period, our three largest U.S. Integrated Circuits Semiconductor companies - Broadcom Corp. (NASDAQ: BRCM) [beige], Analog Devices, Inc. (NASDAQ: ADI) [purple] and Xilinx Inc. (NASDAQ: XLNX) [orange] - are all underperforming with gains of 124%, 150% and 140% respectively.

On an annualized basis, where the S&P broader market has averaged 32.24% and the semiconductor fund SMH has averaged a slightly better 34.93%, Analog has averaged 26.87%, Xilinx has averaged 25.07%, while Broadcom has averaged 22.21% per year. While these are still great returns on their own, in comparison to their sector, these large caps have lagged behind their smaller cap peers.


Despite the recent correction, the outlook for the semiconductor industry remains very upbeat as tabled below, where green indicates outperformance and yellow denotes underperformance.

While the industry's earnings growth in the current and next quarters is expected to vastly outperform that of the broader market S&P, it will slow somewhat in 2015 and beyond, likely due to the expected steady rise in interest rates which will increase debt costs and cut into profits. But since rate hikes are expected to come slowly over several years, the semiconductor industry's earnings are not expected to slow all that much going forward, and are still expected to outperform the broader market's growth rate significantly.

Zooming-in to the Integrated Circuits Semiconductor industry, however, our three highlighted stocks of Broadcom, Analog and Xilinx are all expected to underperform their industry peers in the current quarter, in 2015 and beyond as noted below.

Among them, where Broadcom promises the better growth rate over the near term, Analog promises the better rate further out. Their underperformance relative to their industry is likely due to their size as large caps, which generally do not grow as quickly as medium and small caps.

Yet when compared to the broader market S&P 500 index, our three Integrated Circuits Semiconductor giants fare much better, as noted below. While Xilinx is seen struggling against the S&P average growth rate most of the way through, Broadcom and Analog are expected to outperform by a moderate to significant margin.

But there is more than earnings growth to consider when sizing up a company as a potential investment. How do the three compare against one another in other metrics, and which makes the best investment?

Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the best performing company will be shaded green while the worst performing will be shaded yellow, which will later be tallied for the final ranking.

A) Financial Comparisons

Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.

Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.

In the most recent reported quarter, Analog provided the greater revenue growth, while Broadcom experienced slight shrinkage. Since quarterly earnings growth for Broadcom are not available, this metric will not factor into the comparison.

Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs plus all other costs, including debt, interest, taxes and depreciation.

Of our three contestants, Xilinx operated with the widest of margins with Analog close behind, while Broadcom trailed quite a distance behind.

Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders.

In returns on assets and equity, Xilinx's management team outperformed the others by a significant degree, while Broadcom's team achieved the fewest returns.

Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.

Since Analog's diluted earnings per share are not available, this metric will not factor into the comparison. As a point of interest, however, Xilinx offers the better DEPS percentage over current stock price than Broadcom.

Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value come under scrutiny, as well as the stock price relative to earnings relative to earnings growth, known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers, and might thus be a bargain.

Among our three combatants, Broadcom has the cheapest stock price relative to forward earnings, company book value and 5-year PEG, with Xilinx's stock being the most overpriced.

B) Estimates and Analyst Recommendations

Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.

Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.

Of our three specimens, Broadcom offers the best earnings percentages in all four time periods, while Analog offers the worst EPS percentage over current stock price in three periods, and Xilinx in the current quarter.

Earnings Growth: For long-term investors this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.

For earnings growth, all three companies have their own time periods in which they outshine the others, with Broadcom promising the greatest growth potential over the near term and Analog promising it over the farther term. Xilinx, however, is expected to deliver the slowest earnings growth overall.

Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.

For their high, mean and low price targets over the coming 12 months, analysts believe Analog's stock has the greatest upside potential and least downside risk, while Broadcom's stock has the least upside potential and greatest downside risk.

It must be noted, however, that Analog and Xilinx are already trading below their low targets on account of the recent market correction. While this may mean increased potential for a sharp move upward, it may warrant a reassessment of future expectations.

Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up are analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories, and would only be negating those winners of their duly earned titles.

Of our three contenders, Broadcom is best recommended with 11 strong buy and 13 buys representing a combined 58.54% of its analysts, followed by Xilinx with 4 strong buy and 9 buy recommendations representing 50% of its analysts, and lastly by Analog with 7 strong buy and 7 buy ratings representing 46.66% of its analysts.

C) Rankings

Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.

In the table below you will find all of the data considered above plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison.

The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first place finishes counting as merits while last place finishes count as demerits.

And the winner is… everyone, in a three-way draw! Yet if we have to sort them in order, we'd go by most first place rankings, starting with Broadcom outperforming in 12 metrics while underperforming in 12 for a net score of 0, followed by Xilinx outperforming in 9 metrics and underperforming in 9 for a net score of 0, and lastly by Analog outperforming in 8 metrics while underperforming in 8 for a net score of 0 as well.

Where the Integrated Circuits Semiconductor industry is expected to outperform the S&P broader market significantly in the current quarter, next quarter, 2015 and beyond, the three largest U.S. companies in the space are expected to lag behind their industry peers in earnings growth to a sizable degree, while all three have their moments versus the broader market S&P.

Each offers something advantageous, from Broadcom's best stock price value, to Analog's best dividend and analyst price targets, to Xilinx's best margins and returns on assets and equity. Hence, each would make just as viable a choice in any portfolio with a preference for the Integrated Circuits Semiconductor industry.