BRCM, MRVL: Benchmark Says Hold; Semi Recovery Priced In

The Benchmark Company’s Gary Mobley this morning cut his rating on the semiconductor industry from Overweight to Market weight, writing that “an upward inflection in a semiconductor mini cycle is already priced into the sector.”

Mobley also cut his rating on Broadcom (BRCM) to Hold from Buy, and the same for shares of Marvell Technology Group (MRVL), arguing both stocks have priced in that recovery.

The time to buy into chips was when the “fear factor is greatest,” writes Mobley, i.e., during much of last year, when the Philadelphia Semiconductor Index (SOX) was underperforming the Nasdaq.

But, the SOX has outperformed since Lineary Technology (LLTC) reported on January 17th.

Since the start of 2012, only the home builder segment has performed better than the semiconductor group as measured by the Philadelphia Semiconductor Index (SOX). The SOX is up 18% year-to-date compared to a 9% rise for the NASDAQ. While the SOX lags the NASDAQ on a 3-and 5-year basis, the SOX has easily outperformed broader tech during the past year.

With respect to Marvell, which makes controller chips for hard disk drives, the “hard drive recovery trade is on,” as investors swooped into Marvell and also shares of drive makers Western Digital (WDC) and Seagate Technology (STX) upon signs of a relief following floods in Thailand that devastated the industry.

“Now that the HDD recovery trade is evident, we believe it may be time to trim positions in HDD-related semiconductor companies,” writes Mobley.

Calling Broadcom “Broadcom is the nicest house in a re-gentrified neighborhood,” Mobley nevertheless thinks that although the consensus estimate for 2012 EPS may rise beyond the $2.77 per share it’s at now, that amount should be discounted.

Investors will continue to discount FY12 and 1H13 EPS estimates to account for the eventual (April 2013) absence of Qualcomm royalties. Excluding the Qualcomm royalties, investors may assume Broadcom�s earnings power, in optimal industry conditions, to approximate $2.60 to $2.70. Based on this range, shares are trading at 15.0x EPS and are in line with other large-cap semiconductor and tech hardware companies.

Shares of Broadcom are down 40 cents, or 1%, at $36.60, shares of Marvell are down 25 cents, or 1.6%, at $15.80, and the Merrill Lynch Semiconductors HOLDRS ETF is up 5 cents at $34.22.