Merrill Lynch Has 4 Old-School Tech Stocks to Buy That Blew Away Q4 Earnings
Lee Jackson
The entire investing world seems focused on the new era technology companies that have footprints in social media, online purchasing, virtual reality, industrial and automotive applications and more. While those are huge areas, and surely a gigantic part of the future, some companies that have more than a few long-term skins on the wall are producing some outstanding results.
With fourth-quarter reporting drawing to a close, one thing is certain: some of the old-school tech stocks have been rocking their earnings. We screened the Merrill Lynch research universe and found four companies rated Buy that also reported outstanding earnings.
This leader in semiconductors is working hard to scale away from dependence on personal computers. Intel Corp. (INTC) designs, manufactures and sells integrated digital technology platforms worldwide. The company's platforms are used in various computing applications comprising notebooks, two-in-one systems, desktops, servers, tablets, smartphones, wireless and wired connectivity products, wearables, retail devices and manufacturing devices, as well as for retail, transportation, industrial, buildings, home use and other market segments.
The company also provides communication and connectivity offerings, such as baseband processors, radio frequency transceivers and power management integrated circuits, and tablet, phone and Internet of Things solutions, which include multimode 4G LTE modems, Bluetooth technology and GPS receivers, software solutions and interoperability tests, as well as home gateway and set-top box components.
Intel posted fiscal fourth-quarter earnings of $0.74 per share on $14.9 billion in revenue, which were flat and up 1%, respectively, from the previous year. Analysts expected Intel to post earnings of $0.63 per share on $14.8 billion in revenue, according to a consensus estimate from Thomson Reuters.
Intel investors are paid a solid 2.75% dividend. The Merrill Lynch price target for the stock is $42, while the Wall Street consensus target is $40.09. The stock closed Friday at $37.98 per share.
This top old-school technology stock is top pick for the year ahead at Merrill Lynch, and it has a massive $136.79 billion sitting on the balance sheet. Microsoft Inc. (MSFT) continues to find an increasing amount of support from portfolio managers, who have added the software giant to their holdings at an increasingly faster pace all of this year and last.
Numerous Wall Street analysts feel that Microsoft has become a clear number two in the public or hyper-scale cloud infrastructure market with Azure, which is the company’s cloud computing platform offering. Some have flagged Azure as a solid rival to Amazon's AWS service. Analysts also maintain that Microsoft is discounting Azure for large enterprises, such that Azure may be cheaper than AWS for larger users.
The top analysts believe the company continues to make steady progress with its cloud transition and expect Office 365 and Azure to be solid contributors to top and bottom line for the next several years. While not likely to snag the top slot from Amazon, it could add huge incremental revenue for years to come, especially when you factor in the huge revenue potential from the banks, insurance companies and the financial services industry.
Microsoft has reported quarterly earnings and revenue that easily topped analysts' expectations, as its key cloud product, Azure, saw revenue grow 102%. Fourth-quarter earnings per share (EPS) of $0.69 on revenue of $22.64 billion compare to a year-earlier profit of $0.62 a share and revenue of $22.18 billion. Analysts expected $0.58 in EPS and $22.15 billion in revenue, according to the consensus estimate.
Microsoft shareholders currently receive a 2.37% dividend. Merrill Lynch has a $75 price target on the stock, and the consensus price objective for the software giant is posted at $66.14. The shares close most recently at $65.78 apiece.
Lam Research
This remains one of the top chip equipment picks across Wall Street. Lam Research Corp. (LRCX) designs, manufactures, markets, refurbishes and services semiconductor processing equipment used in the fabrication of integrated circuits. The company offers plasma etch products that remove materials from the wafer to create the features and patterns of a device.
Many Wall Street analysts have highlighted the company and its peers as having a significant equipment opportunity from the NAND evolution as well. Lam Research also appears well positioned to gain share in the wafer fab equipment market, driven by a strong focus on technology inflection spending over the next few years.
Despite so-so foundry and logic spending over the past year, many on Wall Street think that Lam will also continue to benefit from technology transitions such as FinFET, 3D NAND, multi patterning and advanced packaging in 2016 and beyond. Many analysts believe it is the “cleanest” semi-cap story benefiting from cyclical tailwind, SAM expansion and share gains.
Lam Research reported solid results and an impressive shipment outlook. The $8 billion in estimated revenues was well ahead of Wall Street expectations for 2017. The fourth-quarter fiscal 2016 non-GAAP earnings of $1.80 per share surpassed the consensus by 16 cents. Earnings were up 52.6% sequentially and 20.1% year over year. The wafer spending outlook appears strong, and the company should easily grow revenues over 20% year over year in 2017, once again outperforming the industry.
Shareholders are paid a 1.52% dividend. The whopping $140 Merrill Lynch price target compares with the consensus that is posted at $131.69. The shares closed on Friday a $118.24.
Texas Instruments
This is another old-school chip tech company that has come back into favor big-time. Texas Instruments Inc. (TXN) is a broad-based supplier of semiconductor components, ranging from digital signal processors and high-performance analog components to digital light-processing technology and calculators. Some 65% of the company’s sales are exposed to the well-diversified, business-to-business industrial, automotive, communications infrastructure and enterprise markets.
Last week the company released its fourth-quarter 2016 earnings results, posting earnings of $0.88 per share and revenue of $3.41 billion. The consensus forecast was $0.81 cents and revenue of $3.307 billion. The Merrill Lynch team also sees a potential 15% to 22% EPS upside potential if the company's corporate tax rate should drop to the Trump administration proposed 15% to 20% level.
Investors are paid a 2.56% dividend. The Merrill Lynch price objective is $92, while the consensus target is $81.18. Shares closed last Friday at $78.03.
The bottom line from the election is that tax cuts and infrastructure spending look like they are a given. The old school tech growth stocks look like they really make sense now for investors looking ahead to rest of 2017 and beyond.
