Not sure it's going to fly, but definately won't plunge like AMD. To much competition will leave the stock flat for a long time. Only thing worth holding on to is the dividends. A safe stock to make a day trade now and then too, because you know it won't tank.
WE BELIEVE FREE-CASH-FLOW generation over the cycle will remain an important catalyst for stock performance since the semiconductor sector has matured as an industry.
Based on our analysis, Altera (ticker: ALTR) and Broadcom (BRCM) have among the best track records and best prospects for free cash flow and normalized-free-cash-flow growth in our group.
Superior free-cash growth drives superior stock performance. We analyzed peak growth in free cash flow per share and peak-to-peak stock performance for our group. We calculate a strong (0.57 r-squared) and positive relationship existed over the last five years as companies which experienced superior growth in free cash flow also, in general, experienced superior stock performance.
Between calendar 2005 and 2010 (estimated), we estimate our group grew free cash flow per share by roughly 10% per year, slightly above adjusted (excluding financials and energy) Dow Jones average growth of 9% per year. Companies which had the highest growth in free cash flow per share include Micron Technology (MU), Broadcom, Altera and Analog Devices (ADI). Companies which experienced declines or had the slowest growth include Advanced Micro Devices (AMD), Nvidia (NVDA), National Semiconductor (NSM) and Maxim Integrated Products (MXIM).
We estimate calendar 2011/2012 peak free cash flow per share should grow 35% over calendar 2009/2010 peak levels for our group. Stocks with the most expected growth in peak free cash flow per share include AMD, Xilinx (XLNX), Maxim and Broadcom. Stocks with expected declines or the least growth in peak free cash include Micron Tech, Analog Devices (ADI), National Semi and Altera.
Normalized free cash flow per share for our group grew 14% per year from calendar 2005-2010 (estimated). Stocks with the most growth included Broadcom, Nvidia, National Semi and Altera. Stocks which experienced declines or slower growth include Maxim, Micron Tech, AMD and Intel (INTC). We expect 11% growth per year in normalized free cash flow per share from calendar 2010 (estimated) to calendar 2012 (estimated), with the fastest expected growth at Altera, Maxim, Broadcom and Intel.
Our group trades at a median of 13 times calendar 2010 (estimated) free cash flow per share, near the low end of a recent range of 13 times-17 times. Stocks which are trading near or below the low end of a normal range include Micron Tech, Altera, Analog Devices and Linear Technology (LLTC). Stocks which are at or above the midpoint of recent ranges include Texas Instruments (TXN), Xilinx, Broadcom and Nvidia. While we believe near-term risk to estimates exists due to the correction, we believe the stocks could experience multiple expansion in anticipation of improving fundamentals in second-half calendar 2011. Our group trades at a median of 18 times calendar 2010 (estimated) normalized free cash flow per share versus a range of 15 times-20 times. Adjusted Dow stocks trade at 14 times trailing free cash flow per share and 18 times normalized trailing free cash flow.
Despite additional declines in estimates in the coming months, we believe a combination of accelerating fundamentals in second-half 2011, muted industry-capacity growth and undemanding relative valuations will drive outperformance of semiconductor stocks in the coming year.
As a result, we recently raised our stance to positive on the U.S. semiconductor sector. Our top picks are Intel on higher margins and expected order acceleration in second-half 2011 and Altera due to share gains and higher margins over the cycle. We would continue to avoid Underperform-rated Micron Tech due to excess capacity and Underperform-rated National Semi due to share loss.