Nine Picks After the Semiconductor Pullback

Intel, Broadcom, Marvell and others are top picks as overall end-demand remains constructive.

JPMorgan

Recently, the Semiconductor Industry Association announced September monthly industry sales of $31.8 billion, a month-over-month increase of 12.6% and year-over-year increase of 8.1%, above our estimate of an 11.0% month-over-month and 5.6% year-over-year increase.

Semiconductor units (excluding discrete semiconductors) grew 10.5% month-over-month and 8.9% year over year, off a seasonally weaker August where unit shipments had declined slightly by 0.7% month-over-month. By segment, revenue increased on a quarterly basis by approximately 5% for microprocessors, 15% for NAND flash, 11% for DRAM, 7% for analog and 1.7% for microcontrollers. We are maintaining our overall semiconductor-industry forecast of 8% year-over-year revenue growth in 2014 as end-demand in aggregate remains constructive.

Although backward-looking, the data served to confirm a relatively solid demand profile for the September quarter as most of our companies reported in-line to slightly better third-quarter revenue and earnings-per-share results. Despite the recent and sharp pullback in semi stocks, we believe it served to temper expectations to match a slightly weaker fourth-quarter fundamental environment, but should set the stage for stocks to move higher as the market gets more confidence around growth in 2015.

September monthly sales were $31.8 billion, a month-over-month increase of 12.6%, above our estimates of 11.0% month over month. On a quarterly basis, revenue increased 5% quarter over quarter for microprocessors, 15% for NAND, 11% for DRAM, 7% for analog and up 1.7% for microcontrollers.

Unit growth was slightly below estimates, but still strongly positive on a year-over-year basis. Unit shipments excluding discretes increased 10.5% month over month, below our estimate of a 12.5% month-over-month increase and lower than normal seasonality of 12.3%. On a year-over-year basis, excluding discrete unit shipments increased 8.9% in June, below our estimate of 10.5% and below historical seasonality of 11.1%. We believe year-over-year unit growth bottomed at down 4.0% year over year in February 2013, and we expect positive year-over-year unit growth throughout 2014.

September average selling prices (ASPs) excluding discretes increased 1.9% month over month, above our estimate of a decline of 1.6%. On a year-over-year basis, ASPs declined 0.9%, slightly below normal seasonality of a decline in 0.7%.

We are maintaining our calendar 2014 semi sales forecast of 8% year-over-year growth, or $330.0 billion. We expect units excluding discretes to grow 9% year over year and ASPs to decline 1% year over year.

Despite pockets of weakness from the Samsung [of South Korea] supply chain (Maxim Integrated Products (ticker: MXIM ), Cypress Semiconductor ( CY ), Fairchild Semiconductor International ( FCS ), Synaptics ( SYNA ) and Audience ( ADNC )), China service provider markets (Xilinx (XLNX) and Altera ( ALTR )), and slightly weaker industrial demand out of Europe, broader end-market trends remain healthy. Demand from the auto, PC, consumer, enterprise/datacenter, and Apple ( AAPL ) supply chains appear solid. In addition, several broad-based companies (Texas Instruments ( TXN ), Freescale Semiconductor ( FSL ), NXP Semiconductors ( NXPI ), Linear Technology ( LLTC ), Vishay Intertechnology ( VSH ), On Semiconductor ( ONNN ), and Fairchild) have indicated that channel inventory is lean and lead times remain disciplined.

The PHLX Semiconductor Index is up 20% year-to-date and the recent pullback in semi stocks was overdue and served to temper expectations -- we remain constructive on the overall group (semis and semiconductor capital equipment). We remain positive on the overall group through the second half and our top picks are Intel ( INTC ), Broadcom ( BRCM ), Marvell Technology Group ( MRVL ), Micron Technology ( MU ), Xilinx, Texas Instruments, Applied Materials ( AMAT ), KLA-Tencor ( KLAC ) and Lam Research ( LRCX ).

-- Harlan Sur
-- Bill Peterson