Friday, July 23, 2010

Microsemi - Solids Results From An Overlooked Company

Microsemi (Nasdaq: MSCC) is a relatively little-known semiconductor stock that I think value-oriented investors that want tech exposure should consider. That is particularly true given yesterday's earnings report.

Microsemi's revenue rose 15% on a sequential basis, and 27% annually, to $136M - beating the estimate by $6M. Defense and homeland security was about 40% of end-user sales, commercial aerospace and satellite was 20%, medical was 6%, LCD TVs were 7%, mobile was 16% and industrial was 11%.

Defense was definitely a star performer this quarter. Sales were up 24% sequentially, and even though that is inflated by an acquisition, over shipment growth seems to be really solid here right now. Industrial did well, and the company is optimistic about seeing better results from energy (esp. alternative energy) and semiconductor equipment (sort of ironic, is it not? seeing a chip company profit from the equipment that makes more chips...).

MSCC management also continues to be really excited about power-over-ethernet products. I am a little skeptical of this market (I remember people being really excited about it in 2000, too), but I suppose that if Cisco (Nasdaq: CSCO) thinks it really is a major market, I should give them both the benefit of the doubt.

Last and least, medical - medical did not do very well this quarter, but I am cautiously hopeful that the ICD market (a significant end-user market for MSCC chips) will improve with Boston Scientific (NYSE: BSX) back underway and looking to compete more aggressively with St. Jude (NYSE: STJ) and Medtronic (NYSE: MDT).

Along the way, gross margins improved meaningfully (100 bp sequentially, over 600bp annually) and earnings improved nicely by both GAAP and non-GAAP metrics. GAAP operating margin was about 10% - down from about 12.5% in the prior quarter -- due in large part to the costs of the company's acquisition of White Electronics.

Guidance was also pretty optimistic, and this is a company that tends toward the conservative. This outlook has no doubt been brightened by upcoming business like the body scanners they are putting in airports (which could be worth something like $15M - $25M next year), as well as Cisco's power-over-ethernet products. Just last week, in fact, MSCC announced a $22M contract for chips that are going to be used in military GPS applications (like precision-guided munitions and so on).

I am a little nervous about the industrial side, given everything we have been hearing from industrial companies this earnings season, but I figure there is definitely some slack in the medical side that could improve. What's more, I do not really see defense, space, or aerospace (especially military-oriented) spending falling off any time soon - and I have to think that a lot of the specialty applications like advanced sensors and aircraft are going to be solid markets for a while.

All in all, this is a sort of below-the-radar stock that I like. High-reliability chips (one of MSCC's specialty) are a tough market to crack into, so MSCC does not have quite the same margin worries of a Linear Tech (Nasdaq: LLTC) or Maxim (Nasdaq: MXIM). By the same token, though, the break-out growth prospects of a stock like Silicon Labs (Nasdaq: SLAB) really are not there either.

Things are going a bit better than I expected here and I probably do not need to tinker with price target all that much. So, although I am going to dig a bit deeper this weekend, for now I will continue to suggest that these shares are worth at least $21.

Disclosure - I own shares of Microsemi

2 comments:

Tshad said...

Thanks for the article, I put it on my list to follow.

Stephen Simpson said...

Please note the correction - namely, that I own shares. I try to be good about the disclosures, but sometimes I forget.