NEW YORK (TheStreet) -- With Avago Technologies (AVGO) announcing it will acquire Broadcom (BRCM) in a $37 billion deal, we decided to look at other potential investments in the semiconductor industry.
Semiconductors are found everywhere these days, from our phones to our cars to appliances. There were about 65 billionsemiconductors sold in the U.S. in 2013. From 1960 to 2007 the semiconductor industry in the U.S. was responsible for 30% of the total productivity gains contributed to the U.S. economy. The industry directly employs close to 250,000 people in the U.S., and supports over a million additional jobs in the U.S.
The semiconductor sub-sector in the U.S. is also a major export industry.
The semiconductor sub-sector in the U.S. is also a major export industry.
So what are the best semiconductor companies investors should be buying? Here are the top three, according to TheStreet Ratings,TheStreet's proprietary ratings tool.
TheStreet Ratings projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Based on 32 major data points, TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.
Buying an S&P 500 stock that TheStreet Ratings rated a buy yielded a 16.56% return in 2014 beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a buy yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.
Check out which semiconductor companies made the list. And when you're done, be sure to read about which biotech companies to buynow. Year-to-date returns are based on May 27, 2015, closing prices. The highest-rated stock appears last.
Editor's note: These ratings were developed before the Avago-Broadcom deal was announced.
TXN data by YCharts
3. Texas Instruments Incorporated (TXN - Get Report)
Rating: A
Market Cap: $58.3 billion
Year-to-date return: 4.7%
TXN data by YCharts3. Texas Instruments Incorporated (TXN - Get Report)
Rating: A
Market Cap: $58.3 billion
Year-to-date return: 4.7%
Texas Instruments Incorporated designs, manufactures, and sells semiconductors to electronics designers and manufacturers worldwide. It operates through two segments, Analog and Embedded Processing.
"We rate TEXAS INSTRUMENTS INC (TXN) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, notable return on equity, reasonable valuation levels and expanding profit margins. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- TXN's revenue growth has slightly outpaced the industry average of 0.5%. Since the same quarter one year prior, revenues slightly increased by 5.6%. Growth in the company's revenue appears to have helped boost the earnings per share.
- The current debt-to-equity ratio, 0.45, is low and is below the industry average, implying that there has been successful management of debt levels. To add to this, TXN has a quick ratio of 2.06, which demonstrates the ability of the company to cover short-term liquidity needs.
- Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. Compared to other companies in the Semiconductors & Semiconductor Equipment industry and the overall market, TEXAS INSTRUMENTS INC's return on equity significantly exceeds that of both the industry average and the S&P 500.
- The gross profit margin for TEXAS INSTRUMENTS INC is rather high; currently it is at 64.51%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 20.82% is above that of the industry average.
- You can view the full analysis from the report here: TXN Ratings Report
ADI data by YCharts2. Analog Devices, Inc. (ADI - Get Report)
Rating: A+
Market Cap: $21.2 billion
Year-to-date return: 23%
"We rate ANALOG DEVICES (ADI) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures, expanding profit margins, good cash flow from operations and solid stock price performance. We feel its strengths outweigh the fact that the company has had somewhat disappointing return on equity."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The revenue growth came in higher than the industry average of 0.5%. Since the same quarter one year prior, revenues rose by 18.2%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
- ADI's debt-to-equity ratio is very low at 0.18 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Along with this, the company maintains a quick ratio of 3.26, which clearly demonstrates the ability to cover short-term cash needs.
- Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 27.58% over the past year, a rise that has exceeded that of the S&P 500 Index. Regarding the stock's future course, although almost any stock can fall in a broad market decline, ADI should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
- The gross profit margin for ANALOG DEVICES is currently very high, coming in at 70.56%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 25.01% is above that of the industry average.
- Net operating cash flow has increased to $344.03 million or 44.29% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 14.73%.
- You can view the full analysis from the report here: ADI Ratings Report
TSM data by YCharts1. Taiwan Semiconductor Manufacturing Company Limited (TSM - Get Report)
Rating: A+
Market Cap: $127 billion
Year-to-date return: 10%
"We rate TAIWAN SEMICONDUCTOR MFG CO (TSM) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures, notable return on equity, expanding profit margins and good cash flow from operations. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The revenue growth greatly exceeded the industry average of 0.5%. Since the same quarter one year prior, revenues rose by 34.5%. Growth in the company's revenue appears to have helped boost the earnings per share.
- TSM's debt-to-equity ratio is very low at 0.24 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Along with this, the company maintains a quick ratio of 2.75, which clearly demonstrates the ability to cover short-term cash needs.
- The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. When compared to other companies in the Semiconductors & Semiconductor Equipment industry and the overall market, TAIWAN SEMICONDUCTOR MFG CO's return on equity exceeds that of the industry average and significantly exceeds that of the S&P 500.
- The gross profit margin for TAIWAN SEMICONDUCTOR MFG CO is currently very high, coming in at 73.28%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 36.14% significantly outperformed against the industry average.
- Net operating cash flow has increased to $4,539.92 million or 34.72% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 14.73%.
- You can view the full analysis from the report here: TSM Ratings Report
By Jon Kostakopoulos
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