Goldman Sachs' top technology-stock picks for this year include ever-popular performers such as Apple , maker of the iPad and iPhone, to companies only known within their industries, such as chip-equipment manufacturer Teradyne .
The New York-based investment bank gives price targets and the premiums they represent to their closing price as of Dec. 29, 2010. Each company gets a "buy" rating on Goldman Sachs' so-called Conviction Buy List. On the list are eight technology stocks.
Technology stocks are off to a roaring start this year as the prospects of an economic rebound fuel hopes that businesses and consumers will spend big. The chip sector has rebounded strongly after a prolonged recession, and the question is now whether that can be sustained.
Semiconductor stocks, as tracked by Morningstar, are up 5.4 per cent this year, while semiconductor-equipment and materials shares are up 8.1 per cent, and communications-equipment stocks are up an average of 11 per cent. The S&P 500 Index has gained 3.2 per cent so far in 2011.
Below are the stocks, in order, of Goldman Sachs' projected share-price return potential, ranked from least to most.
Teradyne's shares have already exceeded Goldman Sachs' six-month price target of $16, having recently topped $16.25, the highest since August 2007.
The company is a manufacturer of automated semiconductor test equipment used by chip makers and telecommunications products makers. It is in a highly cyclical and highly competitive industry. On Jan. 26, Teradyne reported fourth-quarter earnings that more than tripled those of the previous year at $60.1-million, or 27 cents per share, from $16.9-million, or 9 cents, a year earlier.
Teradyne's price-to-earnings ratio is 9.2, versus the 21.7 of its industry group, and half that of the S&P 500 average, indicating it still may be very cheap. The company predicts that for the first quarter, it will earn 33 cents to 39 cents per share on revenue in the range of $350-million to $375-million. Analysts' outlook is for first-quarter earnings of 19 cents per share and revenue of $295-million. Goldman's analyst said in a research note that "with orders now 35 per cent below peak and expectations reset, we would add to positions as we continue to expect orders to move higher in 2011."
Goldman continued: "Given our expectation of more than $2 per share of free cash flow through 2011, we also expect Teradyne to initiate a (share) buy back." Goldman Sachs expects Teradyne to earn $1.15 per share in 2011. Teradyne shares are up 45 per cent over the past 12 months.
Oracle , the undisputed leader in the database software industry, gets a price target of $36, based on expectations that it can successfully broaden its offerings to become a major provider of enterprise software solutions. The acquisition of Sun Microsystems a year ago will enable the firm to further its strategy of providing complete IT services to its clients. It is operating off a strong base as software licensing updates and product support account for about 50 per cent of its revenue and is the most profitable segment.
Goldman Sachs said in a Jan. 18 research report that it likes the company's expansion into the hardware sector for its long-term growth potential, as well as its continued profit margin expansion. And it said Oracle trades at a relatively cheap 13.1 price-to-earnings ratio based on the investment firm's 2012 earnings per share estimate. That ratio is well below the software group's median P/E of 19.4.
Standard & Poor's, which has Oracle rated "strong buy," said it expects sales to rise 31 per cent in fiscal 2011, to $35-billion, including $7.5-billion of projected hardware systems and support sales gained through its Sun acquisition. It has a fiscal 2011 earnings estimate of $2 per share growing to $2.17 in fiscal 2012. It has a $37 price target on Oracle shares.
A Morningstar analyst notes that "Oracle's revenue growth and operating profits highlight management's impressive track record of successfully identifying, buying and integrating smaller software companies." It projects a compounded annual revenue growth rate of 12 per cent during the next five years, which includes additional revenues from the acquisition of Sun. Shares are up 4 per cent this year after gaining 28 per cent last year.