NEW YORK (TheStreet) –– Though semiconductor stocks have had a strong year in 2014, with the Philadelphia Semiconductor Index gaining more than 28%, JPMorgan (JPM) expects several semiconductor-related names to continue to do well in 2015, as margins expand, free cash flow improves and the companies focus on returning cash to shareholders.
"In our view, despite weakness in some end markets such as handsets (outside of the Apple food chain), China wireless infrastructure, and China industrials, we believe the outlook into 2015 is generally tracking typical seasonality," JPMorgan analyst Harlan Sur wrote in the year ahead outlook. "We continue to view the semiconductor industry as more stable / less cyclical characterized by mid- to high-single-digit annual revenue growth going forward. We currently estimate 2015 Y/Y revenue growth of 3-5% and 2015 Y/Y earnings growth of 6-10%."
JPMorgan notes that the large cap semiconductor names are trading at only 16 times 2015 estimates, while the SOX as a whole trades at 15x earnings.
Without further ado, here are the six semiconductor related names that JPMorgan thinks will have a banner 2015, with the strategy (Growth, Value, Income) next to the investment bank's rating:
Micron (Growth Name, Overweight Rating)
"We expect memory fundamentals to remain favorable driven by ongoing industry consolidation, disciplined wafer capacity growth, and strong demand from diversified end-markets. Near term, we believe Micron will benefit from improved PC fundamentals/Grantley server upgrade cycle and memory content increases in mobile devices. With improved operating performance, the company has been restricting its convertible debt and reducing its fully diluted share count. Micron trades at 10x our CY15 estimated earnings, a discount to S&P and SOX indexes."
Yesterday's Closing Price: $34.86
Market Cap: $38.27B
Broadcom (Value, Overweight Rating)
"With the exiting of cellular baseband behind the company, we expect an aggressive focus on capturing more datacenter networking switch silicon market share in the $2.0B silicon market that is growing at a 25-30% CAGR over the next three years and the $4.0B embedded (non-smartphone/tablet) connectivity markets. We believe Broadcom's focus should drive 5-8% top-line growth and opex leverage should drive operating margins and FCF margins into the 25-30% range going forward. We continue to believe that consensus estimates will move closer to our Street-high C2015 non-GAAP EPS outlook for $3.55 and that management will articulate an aggressive capital return strategy at its December analyst day."
Yesterday's Closing Price: $42.68
Market Cap: $25.25B
Texas Instruments (Income, Overweight Rating)
"We continue to favor TXN on margin performance, broad end-market exposure, cash generation and capital return strategy. We anticipate further gross margin upside as product mix becomes richer and as more products are manufactured at TI's 300mm fab over time (move to 300mm over time should drive 15% product cost reductions). TI's end-market diversification is paying off as weaker end-markets are being offset by stronger end-markets. With disciplined capital expenditures, TI continues to generate significant cash and will likely continue its 100% target payout ratio. TI's dividend yield of 2.5% is near its three-year average and the company has grown its dividend in each of the past five years."
Yesterday's Closing Price: $54.09
Market Cap: $58.11B
Lam Research (Growth, Overweight Rating)
"Lam Research continues to outperform our semicap companies under coverage in terms of revenue and earnings growth and we estimate 9% revenue growth and 15% earnings growth in 2015. LRCX currently trades at 16x our C15E earnings, a discount to peer semicap companies trading at 18x. We believe LRCX should trade at a premium to peers on continued growth expectations, share gains, earnings leverage, and aggressive capital return strategy."
Yesterday's Closing Price: $79.70
Market Cap: $13.08B
Applied Materials (Value, Overweight Rating)
"We believe investors are discounting the likelihood of Applied Materials' pending merger with Tokyo Electron. Should the merger be approved in early 2015, we would expect shares to trade meaningfully higher. On a standalone basis, Applied Materials continues to deliver on operation improvements and is gaining share in key segments."
Yesterday's Closing Price: $23.78
Market Cap: $29.75B
KLA-Tencor (Income, Overweight Rating)
"KLA-Tencor has demonstrated a very shareholder-friendly capital return strategy with a combination of share repurchases and dividends. The company has levered the balance sheet and paid a special cash dividend of $16.50 per share in December 2014. Outside of the special dividend, KLA-Tencor has increased its regular dividend in each of the past five years with an average dividend yield during that time of greater than 2.5%. We believe KLA-Tencor will increase the dividend again in 2015 and, in addition, the company is likely to repurchase ~$200 million of its shares each quarter in 2015."
Yesterday's Closing Price: $69.13
Market Cap: $11.49B
--Written by Chris Ciaccia in New York
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