A Trio of Chip Plays
10/10/2017 5:00 am EST
Quantitative expert Richard Moroney is well know for his industry-leading Dow Theory Forecast; he also publishes a specialized newsletter—Upside— focused on small to mid cap issues. Here, he looks at a trio of semiconductor plays.
Cirrus Logic (CRUS) shares have struggled in 2017, slipping 9% while the median S&P 1500 semiconductor stock has advanced 17%. Despite weak share-price action, Cirrus looks attractive in Quadrix from virtually every other angle.
It receives a Value rank of 95 and Overall rank of 99, two Quadrix scores that that tend to work especially well for growth stocks. It also ranks among the cheapest 30% of stocks in our research universe based on both enterprise ratio and price/free-cash-flow ratio. Both ratios are more than 40% below industry medians.
Growth expectations for Cirrus appear modest for the remainder of 2017 and 2018, though profit estimates are rising. The stock trades at 11 times estimated 2017 profits, versus a median of 18 for the semiconductor industry. Cirrus is a Best Buy.
MKS Instruments (MKSI) has generated a total return of 81% in the past year. Yet its Value rank has risen, signaling that not even the stock’s blistering pace has kept up with operating growth. For the 12 months ended June, MKS grew per-share profits 104% and sales 91%.
The historically volatile semiconductor industry appears to be in the middle of a sustained upswing. Although analyst estimates for MKS have risen in the past 60 days, growth targets still seem reasonable, with the consensus projecting 41% higher profits in the second half of 2017 and 8% growth in 2018.
The stock scores above 85 for Momentum, Earnings Estimates, and Performance, contributing to an Overall rank of 98. MKS is rated Best Buy.
Investors have become accustomed to impressive earnings from Ultra Clean (UCTT). Per-share profits exceeded the consensus estimate in the last four quarters, by an average of $0.08, or 27%. Sales have topped expectations in four straight quarters, by an average of 6%.
Strong operating momentum helps Ultra Clean earn an 85 in our custom profit rank, reflecting solid scores for earnings predictability, three-month revisions, and stock performance. Ultra Clean helps chip makers reduce manufacturing costs and lower production times.
Robust spending on wafer-fabrication equipment, particularly for deposition and etching gear, should help drive earnings. Shares have rallied 177% so far in 2017, and expectations run high. But Ultra Clean seems capable of exceeding consensus estimates in coming quarters. Ultra Clean is rated Buy.