RBC Capital’s Doug Freedman this afternoon initiates coverage of semiconductor stocks with an Overweight rating, writing that the current period of downward estimate revisions is when chip stocks actually start to shine, and to outperform.
Freedman’s top pick is SanDisk (SNDK), but he also has Outperform ratings on Cypress Semiconductor (CY), Marvell Technology Group (MRVL), Analog Devices (ADI), Texas Instruments (TXN), and Intel (INTC). Freedman has a Sector Perform rating on shares of Broadcom (BRCM), Freescale Semiconductor (FSL) and Altera (ALTR).
Diminished expectations reflect “a temporary 2.5-3 quarter inventory correction post-Japan,” writes Freedman. “End demand for electronic systems continues to grow even if recent macro headwinds are causing a pause in present buying patterns. It is our estimation that the semiconductor industry could already be under-shipping real consumption levels.”
The industry may have to “catch up” to real demand in Q1 of next year, he thinks, which could help lift semiconductor revenue growth for 2012 to 6.7%, above U.S. GDP growth of 1.5% and global GDP growth of 3.6%.
The result of the next round of estimate chopping should be to establish a base for the stocks from which to outperform, he thinks:
We expect semiconductors to outperform the broader markets by 1.5x to 2x the SP500 return over the next 12 months. Historically, we believe the first wave of estimate cuts, as currently ongoing, has defined a market bottom. The second round of estimate cuts can cause a re-test of the first-cut low, but often holds, building a base for a sustainable rally.
Freedman has a target on the Philadelphia Semiconductor Index of 450 by the end of 2012. The Philly is at 365.70 today and is well down from its 12-month high of 473.22, hit back on February 22nd.
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