Back in the fall of 2005, I began pondering where I might expect to make my money in 2006, and I came up with two ideas. One was bank stocks, but I don't think they're going to get going until mid-year. The other idea was semiconductors -- a sector that had a decent year in 2005 after a tough 2004.
Though I own only one semiconductor stock today, a few more have recently caught my eye. They include Genesis Microchip
But today I'm focusing on Linear Technology
Still, I think there are several positive aspects to this story. Orders are strengthening, and the company reported a positive book-to-bill ratio for the quarter (meaning that orders received in the quarter exceed the value of products sold). Gross margin is stable at a very high level, and operating income was down just 1% despite nearly $9 million in additional stock compensation expense.
While competition and eventual commoditization is always a concern, I think this market has some things working in its favor in that regard. Analog design requires a bit of "finesse," which puts a premium on recruiting (and retaining) top-flight talent. What's more, it takes a fair bit of R&D to stay in the game, not to mention a large catalog and customer base.
My biggest complaint about Linear today is that it's becoming a bank. The company generates prodigious cash flow, and though it recently hiked its dividend by 50%, it still has more than $1.8 billion in cash on the balance sheet (almost $6 per share) and no debt. That kind of cash can be more temptation than some executives can handle, and I have some concerns about whether it will best be used for (or by) the shareholders.
Prospective investors should be wary of competition, whether from old hands like Analog Devices
For more fully coherent takes on semiconductors:
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).