Highlights of Zacks Investment Ideas: Analog Devices, ON Semiconductor and Taiwan Semiconductor

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Chicago, IL – June 21, 2022 – Today’s Zacks Investment Ideas feature highlights Analog Devices ADI, ON Semiconductor ON, and Taiwan Semiconductor TSM.

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When COVID-19 initially took the world by storm, semiconductor-based technologies played a crucial role in enabling us to work, study and communicate from the comfort of our homes while the outside world was firm.

As a result, semiconductor stocks soared to new highs, allowing investors to reap a host of gains along the way.

Semiconductors, often referred to as microchips, allow the devices we use every day to function efficiently and correctly. About the size of a small coin, we find microchips in mobile devices, vehicles, computers and even freezers.

Simply put, chips have become a foundation of the modern world.

Throughout 2022, these high-flying semiconductor stocks have largely declined in value, mostly by double-digit percentages. A volatile market overshadowed by a hawkish Fed was undoubtedly a driving force behind the poor performance in equities.

Three companies operating in the field of semiconductors – Analog devices, ON Semiconductor and Taiwan semiconductor — have seen their shares pull back significantly throughout 2022. The chart below illustrates the year-to-date performance of the three companies while incorporating the S&P 500 as a benchmark.

As we can see, this has been a difficult time for all three companies, although this has also been the general market theme.

Well below their highs, we had a rare opportunity to buy shares of these companies at levels not seen in some time. Let’s see why these three stocks would be great bets for stock appreciation and long-term growth.

Taiwan semiconductor

Taiwan Semi is the largest dedicated IC foundry in the world. The company is currently ranked Zacks Rank #3 (Hold) with an overall VGM score of an A.

Valuation levels have been lowered by one level; its current forward earnings multiple of 14.3X is a far cry from 2021 highs of 34.9X and well below its five-year median of 19.9X. Additionally, the value represents a notable 13% discount to the S&P 500’s forward price-to-earnings ratio of 16.4X.

Net income growth also appears robust. For the quarter ahead, Zacks Consensus’ EPS estimate sits at $1.48, reflecting strong 60% earnings growth over the prior year quarter.

Net income is expected to increase 44% in FY22, and in FY23, earnings are expected to increase an additional 5.6%.

TSM likes to reward its shareholders via its dividend yield of 1.7% with a payout ratio that stands at 33% of earnings on a sustainable basis. Additionally, the company has increased its dividend ninefold over the past five years, with a five-year annualized dividend growth rate of 13.5%. The annual return is slightly higher than the return of the S&P 500.

Analog devices

Analog Devices is an original equipment manufacturer of semiconductor devices, particularly analog, mixed-signal and digital signal processing integrated circuits. The company currently carries the coveted Zacks Rank #1 (Strong Buy).

ADI’s forward earnings multiple fell to 15.6X, nearly half of its 2020 high of 29.2X and well below its five-year median of 21.1X. What’s more, this represents a tempting 5% discount to the value of the S&P 500.

Net income is expected to rise significantly in the next quarter, with the quarterly estimate of $2.42 per share posting a massive 40% growth in earnings over the prior year quarter.

Going forward, net income is expected to increase by 43% in FY22 and an additional 9% in FY23.

For investors with an appetite for income, ADI has that covered with its annual dividend yield of 2.1% with a payout ratio standing at 39% of earnings sustainably. Undoubtedly to investor tastes, the company has increased its dividend payout five times in the past five years, with a five-year annualized dividend growth rate of 11.3%.

The annual return is well above that of the S&P 500.

ON Semiconductor

ON Semi is an equipment manufacturer of a wide range of discrete and integrated semiconductor components. The company sports a Zacks #2 (buy) ranking with an overall VGM score of an A.

ON is posting an extremely low forward earnings multiple of 10.7X, an absolute fraction of 2020 highs of 42.6X and well below its five-year median of 14.3X. Additionally, the stock is trading at a staggering 35% discount to the S&P 500.

Analysts have raised their earnings outlook across the board over the past 60 days with a 100% review agreement percentage – no doubt a bullish signal. For the quarter ahead, the earnings per share estimate of $1.26 reflects massive triple-digit earnings growth of 100% over the prior year quarter.

For FY22, net income is expected to increase by 66%, and for FY23, earnings are expected to increase by an additional 0.5%.

ON has consistently released strong quarterly results, beating earnings expectations for eight consecutive quarters dating back to June 2020. In its past four quarters, the company has exceeded EPS estimates by an average of 20%.

Conclusion

The market has been tough throughout 2022 for all three companies. Despite all the gloom, there are still bright spots – stocks are trading at much more reasonable valuation levels and earnings are still expected to rise significantly.

All three companies would be excellent starting points for investors seeking exposure to the rapidly growing field of semiconductors.

Let’s face it – microchips aren’t going anywhere for the foreseeable future.

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Past performance is not indicative of future results. The potential for loss is inherent in any investment. This document is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold any security. No recommendation or advice is given as to whether any investment is suitable for any particular investor. It should not be assumed that investments in the securities, companies, sectors or markets identified and described have been or will be profitable. All information is current as of the date hereof and is subject to change without notice. The views or opinions expressed may not reflect those of the company as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management of securities. These returns come from hypothetical portfolios composed of stocks with Zacks Rank = 1 that have been rebalanced monthly without transaction fees. These are not the returns of actual stock portfolios. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for more information on the performance figures displayed in this press release.

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Analog Devices, Inc. (ADI): Free Inventory Analysis Report

Taiwan Semiconductor Manufacturing Company Ltd. (TSM): Free Stock Analysis Report

ON Semiconductor Corporation (ON): Free Stock Analysis Report

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