Focused on keeping product lines fresh
Semtech Corporation (NASDAQ:SMTC) is an analog/mix-signal product manufacturer competing in four end markets:
Its largest business, Communications, produces a range of offerings targeted primarily at telecom infrastructure applications, such as wireless base stations, routers, and hubs. It contributed 31% of total sales in fiscal 2013 (ended in January). Secondly, the High-End Consumer category is primarily composed of items incorporated in portable products, such as smartphones, tablets, and cameras. It was attributable for 29% of fiscal 2013 sales. Third, its Industrial and Other product line consists of automotive, military, aerospace, and medical applications, among offerings for certain growth markets. It contributes 25% of sales. Fourth, the Enterprise Computing division serves traditional computing-related markets, such as PCs, data centers, servers, gaming, copiers, and printers. It accounted for 15% of total sales.
A strong pipeline of new products, including 18 such launches in the April quarter, is driving sales and gross margin expansion. In fact, that measure is trending above 60% and is rising. Accordingly, earnings are expected to remain on a steady upward path.
Semtech Corporation (NASDAQ:SMTC) is looking at the long-term by way of investments in the expansion of wireless capabilities to new markets, as well as touch sensing, through auto, home, and medical end markets.
As such, I believe its focus on growing product markets will support further sales and margin improvements going forward. Earnings are likely to advance nicely as a result, and the impact of inventory glut should be limited.
Accordingly, I believe the shares are a buy for the long term at their current forward P/E of 11.6.
Innovator poised for an earnings rebound
Marvell Technology Group Ltd. (NASDAQ:MRVL) is a designer of high-performance application-specific products that predominantly serve three end markets:
Foremost, the Storage unit supplies the enterprise, consumer, desktop, and mobile industries with Drive Controllers and other offerings. It contributed 47% of total sales as of February, 2013. Second, its Mobile and Wireless business provides that industry with communications processors, thin modems, and connectivity solutions. Sales totaled 26% of the overall amount. Third, networking products produce offerings for new network architectures, such as cloud infrastructure and service provider infrastructure. Sales were 22% of last fiscal year’s (ended in February) figure.
Specifically, Marvell Technology Group Ltd. (NASDAQ:MRVL)’s wireless connectivity business ought to grow nicely, supporting a profit recovery over the back half of this year. It is introducing numerous products for growth product markets such as tablets, ultrabooks, gaming, and video. Maybe even more so than with Semtech Corporation (NASDAQ:SMTC), I expect sizable investments in R&D, of more than 30% of sales of late, to come to fruition.
Thus, as Marvell Technology Group Ltd. (NASDAQ:MRVL) continues to develop proprietary technologies, it is expected to realize better gross profits, perhaps better than the industry as a whole. Profit margins, too, should remain better than those of its peers. (see ratios)
For that reason, I look for Marvell Technology Group Ltd. (NASDAQ:MRVL) shares to perform well over the coming year. It should remain at the forefront of broadening product markets. Be aware of the risk of deriving more than 20% of sales from one customer, Western Digital Corp (NASDAQ:WDC). The stock’s forward P/E is 13.
Foothold in rapidly-growing markets
Skyworks Solutions Inc (NASDAQ:SWKS) offers high-performance analog semiconductors to a wire range of end markets. Currently, it is focused on providing solutions for the smartphone, tablet, smart energy, power management, and “machine to machine” sectors.
The most notable aspect of this company is its ongoing strong upturn in earnings per share, on a year-over-year basis. In particular, June-quarter earnings climbed 20%.
Product launches aimed at the mobile internet market should help boost results going forward. For instance, Skyworks Solutions Inc (NASDAQ:SWKS) is gaining design wins for enterprise routers, backlighting, and power management products, and other chips, serving the telecom equipment, portable device, and automotive sectors, among others.
In all, Skyworks Solutions Inc (NASDAQ:SWKS) is well positioned to capitalize on opportunities in expanding product markets. Its margins are expanding substantially as revenue gains ground.
I look for Skyworks Solutions Inc (NASDAQ:SWKS)’ sales to continue to increase at a rapid, likely double-digit percentage on an annual basis, driving profit gains in fiscal years 2013 (ends in September), 2014, and beyond. Indeed, its profit growth rate may well continue to outpace the broader semiconductor industry.
The shares are trading at a forward P/E of 9.3. Given the subdued valuation, they offer upside for aggressive investors.
Summary
All of these semiconductor makers are seeking to boost their presence in higher-growth sectors. In light of the likely further adoption of advanced technologies by a wider range of customers, they may well be good investments. I suggest risk-tolerant investors buy at least one of the three for their portfolios, in light of the stocks’ appealing valuations at this juncture and the companies’ solid earnings growth prospects.
The article 3 Semiconductor Stocks for You to Consider originally appeared on Fool.com and is written by Damon Churchwell.
Damon Churchwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Damon is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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