Have Semiconductor Stocks Bottomed? Macquarie Thinks So

In a report published Monday, Macquarie analyst Deepon Nag commented on the U.S. semiconductor space, noting that "estimates haven't bottomed, but stocks may have."

According to Nag, semiconductor stocks have underperformed as of late to due to softening end demand, inventory destocking and reduced flow of M&A activity which have all "pressured" forward estimates and stock multiples.

Nag said that third-quarter estimates appear to be "below seasonal" but the Consensus estimates for the fourth quarter and next year's first quarter are "above seasonal." However, the analyst added that if all companies under his coverage report seasonal performance from the fourth quarter 2015 through the fourth quarter 2016, the average reduction in estimates should only be 1 percent across the group.

Nag further suggested that risk to estimates in the fourth quarter still exist, but cuts to earnings estimates will be "smaller in magnitude," which has historically been a "good setup" for the group's stock performance. In fact, the analyst added that semiconductor stocks are factoring in their lowest growth prospects since the financial crisis and that investment sentiment could be "overly conservative."

Texas Instruments Upgraded To Outperform

Nag upgraded shares of Texas Instruments Incorporated TXN to Outperform from Neutral with a price target raised to $60 from a previous $55 given the company's recent share gains in the analog and embedded markets, structural margin expansion and operating expenditure discipline.

According to Nag, consensus estimates for the fourth quarter (4 percent fall in revenue) may be "too high" but the analyst argued that the Street is under-appreciating the company's gross margins prospects as the company is expected to see as much as a 200 basis point tailwind from depreciation over the next several quarters while the Street is only modeling a 70 basis point expansion.

Finally, Nag argued that the stock is "cheap" as it is trading at 1.1x the S&P 500 P/NTM EPS which is below its peer group average despite the company's superior earnings growth over the next several years.