3 Semiconductor Stocks From an Earnings Perspective

Includes: ARMH, BRKS, VSH
by: Evan Harris

The current earnings season has stirred up quite a bit of interest in the Technology sector. Big names like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Google (NASDAQ:GOOG), and Research in Motion (RIMM) are making waves in the industries of Application Software, Personal Computers, and Internet Services. But a few stocks are worth examining in a less glamorous corner of the tech sector: Semiconductors. They play a pivotal role in many technological products, yet they remain far from the spotlight dominated by the headliners.

It is easy to rationalize the neglect of the semiconductor industry. iPads and Androids are much trendier than light-emitting diodes and solar photovoltaic panels. However, it is hard to overlook an industry with a combined market cap of 594.2 B, composing just over 11% of the technology sector. Their average P/E of 12.9 sits just below the overall tech sector's 15.3, and a P/B of 2.4 sits right in line with the sector's 2.5. Let's take a look at three stocks from the semiconductor industry.

Brooks Automation Inc. (NASDAQ:BRKS), an American producer of semiconductor equipment & materials, specializes in vacuum instrumentation and cryogenic refrigeration systems. At $10.59 a share, Brooks looks very impressive from a value standpoint. Its P/E of 7.5 is less than two thirds of the industry average. In addition, its P/B of 1.6 is right at two thirds of the industry average. With no debt and conservative accounting practices, Brooks is definitely worth considering.

Digging deeper, we see that over the past three years, Brooks has seen 7 quarterly EPS increases. In addition, quarterly revenue has steadily increased from $37.3 M in Q2 2009 to $192.7 M last quarter. While last quarter's revenue was 5 times that of Q2 2009, stock price has barely doubled from its price of $5.07 in May of 2009. Its current price of $10.59 does not accurately reflect the large increase that Brooks' revenue has experienced since coming out of the recession. Keep an eye on Brooks, for a positive August 4 earnings report could mean big things for this small cap semiconductor.

Vishay Intertechnology Inc. (NYSE:VSH), a US broad line manufacturer of semiconductor equipment, has increased in size and product diversity through a series of strategic acquisitions since 1985. A current P/E of 7.3 puts Vishay in good standing headed into their August 2 earnings report. Vishay also currently trades at a P/B of 1.4, just under two thirds of the industry average. Conservative accounting practices, growth projections, and these attractive ratios give Vishay a Strong Buy rating from us at Sabrient.

Since Q1 2009, revenues are up from just above $400 M to $695 M in Q1 2011. Revenue growth has been steady since 2009 and is nearing its pre-recession high of just over $700 M. A quarter-over-quarter (Q/Q) EPS change of 87% shows Vishay’s recent ability to increase earnings in the short term. Vishay’s main advantage in the world of semiconductor manufacturing is in product diversity. Resistors, capacitors, and diodes are their current segment leaders by quarterly revenue dollars. Both resistors and capacitors are generating more revenue than they were pre-recession. This diversity allows Vishay to consistently maintain and increase total revenues even during seasonal revenue decreases for certain product segments.

Keep in mind that unlike Brooks, Vishay’s price has seen substantial appreciation since 2009, paralleling the increasing quarterly revenue. Vishay hit its highest price since 2004 in late April of this year at $19.08, creating a P/E of 10.16. Now at $15.01, shares are priced at a discount from an earnings perspective. For shares to trade at the prior P/E, price would need to rise to over $20. Keep an eye on Vishay through its upcoming earnings report. The recent dip in price presents a promising buying opportunity.

A bullish market outlook alongside these valuations may warrant some long positions in BRKS and VSH. However, in the spirit of balance, and with respect for the uncertain macro climate at hand, here’s a look at a semiconductor stock from the bottom of Sabrient's rankings.

ARM Holdings (NASDAQ:ARMH) is an intellectual property supplier for semiconductor manufacturers stationed in the UK. At 96.4, ARM's P/E is more than five times that of its industry (average P/E for specialized semiconductors is 17.8). Its P/B, at 8.3, sits above double the industry average. These high ratios indicate that ARM's stock price is highly overvalued. With a Q/Q change in EPS of just 7.4%, I see no indication that ARM will be able to support its high market price of $29.75 in the near future. Keep an eye out for their July 30th earnings report.

With moderately aggressive accounting practices, hefty ratios, and no recent notable moves in EPS, ARM Holdings is a stock to avoid on the long side, and to consider on the short side.

In this crucial industry within the Technology sector, Brooks and Vishay look good for both value and growth investors, while ARM presents a bearish opportunity for the short seller.

(Note: All prices and ratios shown above are current as of July 21, 2011).

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

Additional disclosure: I am employed by Sabrient Systems.