5 Chip Stocks JPMorgan Likes

NEW YORK ( TheStreet) - Semiconductor stocks such as Intel ( INTC), Texas Instruments ( TXN), Xilinx ( XLNX), Analog Devices ( ADI) and ON Semiconductor ( ONNN) could see further upside, according to JPMorgan, which believes the PC market may be growing faster-than-expected.

Analyst Christopher Danely notes that inventories are being replenished and hard-disk-drive supply is ramping up. "Our industry checks indicate order rates from the PC end market continue to track ahead of expectations in 1Q12 due to inventory replenishment resulting from faster than expected ramp of hard disk drive supply," Danely wrote in a research note.

The analyst notes that component inventory for the PC market (primarily semiconductors) is getting replenished at a faster-than-expected rate, as worries over the hard disk drive shortage are abating.

Here are five semiconductor stocks that JPMorgan believes have more upside ahead:

Intel

Intel shares have performed well year-to-date, gaining 16.67%, and 38.28% year-over-year.

The chip giant has had exceptional gross margin performance, in the low 60% range, and J.P. Morgan raised its first-quarter earnings estimates for the firm, as Danely believes orders are tracking ahead of estimates. J.P. Morgan expects $13 billion in revenue and gross margins of 64% in the first quarter, compared to Intel's guidance of $12.3 billion and $13.3 billion in revenue, and gross margins of 61% to 65%.

"We are expecting above-seasonal QoQ growth in 2Q12 due to inventory replenishment but roughly normal seasonal growth during 2H12. Moreover, our C12 gross margin estimate of 63.8% is below the midpoint of Intel's guidance of 64.0% due to lower sales," Danely wrote in his research note.

Despite Intel's exceptional performance potential and short-term upside, J.P. Morgan downgraded the name in January, on worries about peaking gross margins and estimates. Since the downgrade on January 17, shares have gained 10.54%, compared to a 13.5% gain in the Nasdaq. Danely rates Intel shares "neutral" with a $25 price target.

Texas Instruments

Texas Instruments makes chips for a wide array of electronic devices, including the iPhone, iPad and other mobile electronics. Shares have gained 14.68% year-to-date.

J.P. Morgan believes the chipmaker offers more upside than Intel or even Advanced Micro Devices ( AMD), as it has more leverage, which could lead to upside from the consensus estimates. J.P. Morgan rates Texas Instruments shares "overweight" with a $39 price target.

Analysts polled by Thomson Reuters expect Texas Instruments to report $3.06 billion in revenue and 29 cents per share for the first-quarter. The company, however, recently cut first-quarter guidance, saying it still sees a reduction in demand for its wireless products. Texas Instruments' first-quarter outlook is now 15 cents to 19 cents per share on a revenue range of $2.99 billion to $3.11 billion. The Dallas-based firm had previously projected earnings of 16 cents to 24 cents per share on a revenue range of $3.02 billion to $3.28 billion.

TheStreet Ratings rates Texas Instruments "buy" with a B+ grade and a price target of $38.61.

Analog Devices

Analog Devices makes digital signal processing integrated circuits (ICs) used in a wide array of commercial applications. Shares have gained 12.21% year-to-date.

Like Texas Instruments, J.P. Morgan believes Analog Devices allows for more earnings upside due to higher leverage and higher exposure to a turnaround in the semiconductor story. J.P. Morgan rates Analog Devices shares "overweight" with a $42 price target.

Analysts polled by Thomson Reuters expect Analog Devices to generate $648.06 million in revenue and earn 46 cents a share in the first quarter. In a March 6 research report, Danley wrote, "We continue to believe the reasons we are positive on ADI remain intact - the company should experience a secular increase in margins, continue to pay a high dividend yield, and is one of the cheapest high-quality semiconductor stocks."

TheStreet Ratings rates Analog Devices "buy" with an A grade and a price target of $45.99.

Xilinx

Xilinx designs programmable platforms, used to make the microprocessors that go into personal computers. As the PC end market sees stronger-than-expected demand, demand for Xilinx's equipment should remain strong. J.P. Morgan rates Analog Devices shares "overweight" with a $40 price target.

Analysts polled by Thomson Reuters expect Xilinx to record $530.48 million in revenue and earn 40 cents per share in the first-quarter. In a Feb. 29 research report, Danley wrote, "We believe Xilinx is experiencing a secular increase in margins due to its recent shift to Taiwan Semiconductor Manufacturing Co. (TSMC) as well as better cost controls. Xilinx had an all-time high of 35.9% operating margin in C3Q10 and we expect that to be exceeded driven by higher gross margins via moving to TSMC and lower operating expenditures."

TheStreet Ratings rates Xilinx "buy" with an A grade and a price target of $43.26. Shares have gained 13.59% since the start of 2012.

ON Semiconductor

ON Semiconductor makes digital signal processing integrated circuits (ICs) used in a wide array of commercial applications. Shares have gained 15.41% since the beginning of 2012.

In a February research report following earnings, Danley was extremely positive on ON, mostly because of its leverage. "The main reason we are Overweight ON Semi is we believe it has the highest leverage in our coverage universe and our C13 estimates are increasing almost 100%. We believe further upside to estimates is likely, and as a result, we reiterate our Overweight rating." ON Semiconductor increased gross margins 200 basis points quarter-over-quarter to 31.1% during its fourth quarter, and J.P. Morgan expects additional upside in the first quarter, moving to 32%.

J.P. Morgan rates Analog Devices shares "overweight" with a $10 price target.

Analysts polled by Thomson Reuters expect ON Semiconductor to generate $742.74 million in revenue and earn 10 cents per share in the first-quarter.

TheStreet Ratings rates ON Semiconductor "hold" with a C grade.

Interested in more on ON Semicondcutor? See TheStreet Ratings' report card for this stock.

>>To see these stocks in action, visit the 5 Chip Stocks JPMorgan Likes portfolio on Stockpickr.

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-- Written by Chris Ciaccia in New York

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