Thanks to widespread use, electronics has been a popular and profitable sector for many investors. Whether at the component level (such as integrated circuits) or the product level, companies like Analog Devices Inc (NASDAQ:ADI), Advanced Micro Devices Inc (NASDAQ:AMD), JDS Uniphase Corp (JDSU), Microchip Technology Incorporated (NASDAQ:MCHP) and Western Digital Corp (NYSE:WDC) have great potential. Let's take a look at these five companies, focusing on their growth prospects and dividends.
Analog Devices Inc
Norwood, MA-based Analog Devices Inc specializes in the design, manufacturing, and distribution of integrated circuits, whether analog, mixed-signal, and digital signal processing. This has become an increasingly competitive market, as low-cost manufacturing in Asia creates price pressure. For this reason, demand and revenue are problems for the company, as it has missed earnings targets for the last two quarters. Falling share prices and earnings should be a concern as more than 2 percent of its float is being sold short.
Currently trading at $40 per share, the company has a 52-week range of $29.23 - $43.28 and a target of just over $38. The company is paying a dividend ($1.00 annually for a 2.5% yield), but its 3.13 price to book ratio, its 7% drop in quarterly revenue and its 18.4% decline in earnings all raise warning flags. This is a difficult industry, and choosing to invest in a struggling company right now is not recommended.
Advanced Micro Devices Inc
Competing in the semiconductor market against companies like ARM Holdings Plc (NASDAQ:ARMH) and Intel Corporation (NASDAQ:INTC), Advanced Micro Devices is finding the going very tough. At $5 billion, the company is the smallest of the three (ARM has a market cap of $12 billion and Intel $136 billion), and it is the only one of the three not to record quarterly earnings growth (Intel had 5.7% and ARM posted an 11.3% gain). This lack of success has contributed to a 13% drop in Advanced Micro Devices stock over the past year, leaving its $7.25 price near the middle of its 52-week range of $4.31 - $9.58.
The future prospects are not looking too good for Advanced Micro Devices either. At $7.15, the one-year target estimate suggests the stock is overvalued, a problem that is supported by its 3.34 price-to-book ratio. Additionally, a recent report indicated that smartphone and tablet processors created by Advanced Micro Devices are inferior to the ones made by ARM Holdings. In spite of being a dividend stock, investors should definitely avoid buying AMD at this time, due to its struggles and its poor competitive showing.
JDS Uniphase Corp
JDS Uniphase offers optical products and testing and measuring equipment for the electronics industry. Much like Advanced Micro Devices, JDS struggled in 2011, reporting a 12.8% decline in quarterly revenue, while its price-to-book ratio of almost 3 suggests that the stock is overvalued. It is currently trading around $13.75 per share, nearly 17% below its target price of $15.88.
There is no doubt that 2012 will be an important year for JDS Uniphase. The company has a hefty price-to-earnings ratio of 96, yet its return on equity of 3.16% will hardly inspire additional investment. Although there appears to be room for some share price gains, uncertainty about its direction forces me to rate the stock as a hold.
Microchip Technology Incorporated
Chandler, AZ-based Microchip Technology Inc offers a wide range of electronic components, but it specializes in microprocessors for the automotive, communications, computing, consumer, and industrial control markets. This mixed growth and dividend stock has a current price around $37.25 per share, just above the midpoint of its 52-week range of $29.30 - $41.50. The stock is projected to gain 3% in the next year (one-year target of $38.50), and the company pays an annual dividend of $1.40 to produce a yield of 3.7%. This handsome dividend actually pays investors more than treasury bonds.
The company's numbers for 2011 were down, as it posted a quarterly revenue loss of 10.5% and an earnings drop of 23.1%. The concern I have for Microchip Technology Inc going forward is how the company will sustain its dividend rate. Already sitting at a payout ratio of 55%, the stock's price-to-book ratio of 3.68 indicates that it is overvalued and makes it hard to believe the company can maintain such a high yield. I would rate the company as a short-term hold, but recommend that investors monitor its metrics to avoid getting caught by any sustained drops in share price.
Western Digital Corp
Long known as a leader in the storage, management and protection of digital information for the computer industry, Western Digital is a $9.2 billion company that faces stiff competition from cloud and flash-based storage providers, yet the company still appears to be a good option heading into 2012. Trading around $39 per share, the stock is near the top of its 52-week range ($22.64 - $41.87), while its one-year estimate of $43.83 suggests it will break through to record a new high. The share price has increased more than 13% over the past year.
Based on its expectations, the outlook is good for Western Digital. The company's price-to-book ratio of 1.58 indicates that the stock is reasonably priced and its 12% growth rate is close to the projected 16% rate of the industry as a whole. Western Digital doesn't pay a dividend; this coupled with a so-so earnings projection is why I am neutral on the stock.
Tough Going for Electronics Stocks
The current economic climate has not been kind to large portions of the electronics industry. In spite of continued demand, American companies have faced stiff competition from overseas manufacturers. This pressure affects demand and lowers prices, causing earnings to take a hit. With all the factors at play, I would recommend Microchip Technology Incorporated as a short-term buy, while rating both JDS Uniphase Corp, and Western Digital Corp as holds. I would not recommend taking positions in either Analog Devices Inc or Advanced Micro Devices Inc at this time.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.