UBS Cautious on Top Chip Stocks Before Earnings This Week

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With another huge week of earnings ready to hit the tape, many analysts and investors are trying to handicap not only how the earnings for the quarter will be, but also the outlook for the second half of the year. With Apple Inc. (AAPL) expected to launch as many as four devices in the second half of the year, including the highly anticipated iPhone 6, the top chip names could be poised to overachieve.

A new report from the chip analysts at UBS offers their thoughts on top chip stocks that will put out their second-quarter earnings reports this week. With some of the biggest companies in the industry set to report numbers, the UBS team is giving investors insight into what may happen.

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Broadcom Corp. (BRCM) disappointed with its first-quarter earnings results as the company struggled in its mobile and wireless business. The UBS team thinks that the second-quarter numbers will come in better. Given that Broadcom will either sell or shut down its mobile baseband division by year end, UBS also believes any color on future sources of growth will be in greater focus. They caution if Samsung starts losing smartphone share, third-quarter numbers could be light.

Investors are paid a 1.3% dividend. The UBS price target for the stock, which is rated Neutral, is $35. The Thomson/First Call consensus price target is higher at $29.31. Broadcom closed Friday at $38.74 a share.

Linear Technology Corp. (LLTC) is also rated Neutral at UBS and has a strong 42% industrial end market exposure, which may help to boost the second-quarter report. The UBS analysts expect in-line results, and the outlook on improving macro trends is supportive for modest industrial and automotive growth rates. The company produces power management, data conversion, signal conditioning, radio frequency and interface integrated circuits, as well as µModule subsystems and wireless sensor network products.

Linear Technology investors receive a 2.3% dividend. UBS has a $46 price target, and the consensus target for the stock is $46.39. The stock closed Friday at $47.21.

Maxim Integrated Products Inc. (MXIM) is also Neutral rated and is expected to report in-line numbers this week. The UBS team is somewhat concerned that its Samsung wireless exposure in a broad range of Samsung mobile products, including the flagship Galaxy S5 could be a potential negative in upcoming third-quarter earnings. The company engages in designing, developing, manufacturing and marketing various linear and mixed-signal integrated circuits worldwide.

Investors receive a solid 3% dividend. The UBS price target for the stock is $31, and the consensus price objective is $36.09. Maxim closed Friday at $34.09 a share.

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Qualcomm Inc. (QCOM) remains the 900-pound gorilla in the wireless space, despite its slight earnings miss last quarter. While the UBS analysts only expect an in-line report this week, they feel that the company could produce 9% quarter-over-quarter gains in the fiscal fourth-quarter report from the seasonal ramp of new products, especially from Apple. They also point out that much of China's 4G demand is expected to happen in the second half of 2014. And Qualcomm's Systems on a Chip will go into up to 1.3 billion devices this year. This represents a consolidated growth rate of 13% to 20%. Because Qualcomm operates at such economies of scale, the company has a lot of flexibility when it comes to pricing. That means it can produce margin gains better than many competitors.

Investors are paid a 2.1% dividend. The UBS target price for Qualcomm stock, which is rated Buy at the firm, is $89. The consensus target is set at $85.61. Qualcomm closed Friday at $79.39 a share.

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Texas Instruments Inc. (TXN) is an old-school name that also comes in rated Neutral at UBS. Yet, the UBS analysts are very positive on the report this week from the venerable chip giant. They expect the company to post a very solid 10% quarter-over-quarter gain. In their report, the UBS analysts cite valuation as the main reason that the stock is not rated Buy, as the report for the quarter should be outstanding.

Investors are paid a solid 2.5% dividend. The UBS price target for the stock is $49, and the consensus target is posted at $49.22. Shares closed Friday a$48.82.

With many of these top chip stocks rated Neutral, the UBS team is clearly seeing the stocks as fully valued. With prospects for many of these companies reasonably bright looking forward, investors should look for pullbacks in price to slowly scale in some capital.

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