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Keep These Automotive Chip Makers on Your Radar

Autos remain a key growth opportunity for many chipmakers, but investors should wait for a pullback in prices before diving in.

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We believe the automotive end market remains the most attractive growth opportunity for broad-based analog and microcontroller chipmakers. While global automobile production is expected to rise at a 1%-3% average annual pace, we foresee far greater auto-related analog chip growth thanks to increased content per vehicle. We think the firms we cover can increase their auto chip revenue at an 8% average annual pace, ahead of the chip industry as a whole as well as industry analyst expectations for the overall auto semiconductor market.

Nonetheless, we fear that valuations are stretched. While the analog leaders in our coverage universe are well managed and offer attractive capital-allocation policies in the form of rising dividends and buybacks, we think some investors, perhaps in search of yield, are being lulled into a false sense of security, believing that the industry is no longer cyclical. We think cycles still exist, though the analog cycle is more related to GDP than the supply-chain inefficiencies in PCs and cell phones that drove cycles in years past. We’re still enthusiastic buyers of these high-quality names when adequate margins of safety arise, but we would stress patience at current valuations.

Brian Colello does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.