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3 Promising Stocks in the Electronic Components Industry

Sunday - 6/30/2013, 3:02am  ET

Some tech companies seem well-positioned to benefit from the increasing demand for technology (especially mobile and “green” technologies) worldwide. OmniVision Technologies Maxwell Technologies , and FormFactor   manufacture and market specific electronic components that are used in many upcoming products, like hybrid vehicles and smartphones. Let´s take a closer look at them and see if they could be good investment opportunities.

Sensing success

OmniVision Technologies designs, develops, and markets integrated semiconductor image-sensor devices, and less than a month ago, delivered a third consecutive earnings surprise, surpassing consensus estimates by 47.6%. Guidance provided by management also exceeded expectations, portraying an encouraging outlook for investors.

Going forward, plenty of growth opportunities should emerge from its core smartphone segment, boosted by an increasing demand in emerging economies, a “growing position in the cheaper handset categories and increasing demand for higher resolution sensors” (Zacks). In addition, other segments like tablets, security, automotive, notebooks, and webcams should contribute with further revenue growth.

In some sectors, like automotive and security, the firm´s position is already strong and demand should drive expansion; in others, like PCs and notebooks, management projects market share increases over the next couple of years.

Moreover, management has pursued a diversification strategy in order to reduce its dependence on the highly competitive mobile phone market, having divested its risks successfully and having become less susceptible to the tech industry cycles.

Trading at 10 times consensus earnings, about half the industry average valuation, while offering compelling growth prospects (about a 20% increase in EPS expected over each of the next five years) and a strong balance sheet, I’d recommend buying and holding on to this stock.

Efficient energy, efficient investment

Maxwell Technologies develops and manufactures cost-efficient energy storage and power delivery products for transportation, industrial telecommunications, and other applications and microelectronic products for space and satellite applications. Lately, the company has been growing on the back of an increased demand for hybrid electric buses. Going forward, the rising demand for the firm’s products in utility infrastructure, renewable energy, public transportation, and space programs should contribute substantially to top-line growth. Moreover, its main end-markets, the U.S. and the E.U., are likely to provide more upside on account of government stimulus plans for “green” technologies.

In addition, its leading market share in the ultracapacitor market puts Maxwell in an advantageous position to tap the opportunities provided by rising hybrid bus production in China, and the increasing global preference for “eco-friendly” vehicles.

With a strong balance sheet and low long-term debt in relation to its capitalization, this stock looks like a buy. Trading around industry average valuations while offering better growth prospects (of 25% per year over the next five, compared to the 12% industry average), I would advocate adding this stock to your portfolio.

High performance (not only in the probe card segment)

FormFactor  designs, develops, manufactures, sells, and supports precision, high performance advanced semiconductor wafer probe cards based on proprietary technology. Its stock had been beat down over the past few years, but started recuperating a couple of months ago, after a year of consecutive positive earnings surprises. Currently trading at under $7, at about 1.1 times its book-values and 1.8 times its sales, both considerably below industry average valuations, while offering compelling, attainable, and sustainable growth prospects, I´d recommend buying this stock for the long-term.

As the company swings its focus away from the PC DRAM market and into the mobile segment, growth opportunities are many. The recent agreement to purchase MicroProbe increases the firm’s exposure to these non-DRAM sectors, making FormFactor the largest probe card manufacturer and supplier of probe cards to the SoC (System-on-Chips) market.

This (the SoC) segment, in particular, should contribute with high growth over the next few years. In addition, MicroProbe is more profitable than FormFactor, and will therefore contribute to the company’s margins and generate positive cash flow.

Moreover, “in the price-sensitive economic world we now live in, FormFactor is positioned nicely to benefit from the strong demand for copper pillar packaging, which should be a significant growth driver for the company” as well (Seeking Alpha).

Bottom line

In all, these three not-so-well-known companies offer compelling growth prospects at reasonable valuations. Exploiting diverse niches that will benefit from the increasing demand for technology globally, OmniVision, Maxwell, and FormFactor seem poised to grow. Consider adding them to your portfolio.

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