Diodes Poised To Benefit From Semiconductor Industry Consolidation, Wells Fargo Says In Bullish Initiation

The market seems to underappreciate the secular tailwind for Diodes Incorporated DIOD created by the consolidation of four major semiconductor companies, according to Wells Fargo.

The Analyst

Gary Mobley initiated coverage of Diodes with an Outperform rating and $55 price target.

The Thesis

Consolidation in the semiconductor industry has allowed Diodes to penetrate key automotive customers as a second source supplier, while also helping to improve the pricing environment for the company’s product, Mobley said in the Monday initiation note. (See his track record here.)

The company has a multiyear mission to drive more sales and improve the mix of products while targeting the industrial and automotive end markets, the analyst said. Both end markets offer growth and margin potential, he said.

Although global auto sales may decline 4% in 2019, led by China, the market for automotive semiconductors remains much more robust than the broader semiconductor market, Mobley said.

This is due to the rise in semiconductor content per vehicle, the analyst said. 

Diodes’ gross margin was at least 500bp higher in the automotive and industrial markets, he said. 

The potential accretion from the pending acquisition of Lite-On Semiconductor does not seem to be fully reflected in Diodes’ share price, according to Wells Fargo.

The sell-side firm expects the acquisition to add 40-50 cents to the company’s EPS in the first full year.

Price Action

The stock was trading higher by 3.64% at $38.97 at the time of publication Monday. 

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