Sunday, May 1, 2016

Seeking Alpha: Semtech Needs To Translate Expected Growth Into Shareholder Value

It is hard to argue that Semtech (NASDAQ:SMTC) has historically served its investors particularly well. The 10-year performance of the stock (up about 25%) lags not only the PHLX Semiconductor Index by a meaningful amount (the SOX is up more than 70% over the past decade) and the Nasdaq, but other chip companies like Microsemi (NASDAQ:MSCC), Integrated Device Technology (NASDAQ:IDTI), and Texas Instruments (NASDAQ:TXN), and the five-year comps are even worse.

What's more, the internal value creation isn't impressive at first blush either, with tangible book value per share down almost 75% since 2007 (a CAGR of around negative 13%). Gross margins have been generally healthy over that time and free cash flow has always been positive, but metrics like operating margin and ROIC are less exciting.

I'm not looking to bury Semtech, as I do think the company's technology for enterprise datacenters, wireless communication, sensors, and power management can grow the business. Moreover, there would seem to be opportunities to improve operating leverage through tighter management of SG&A and R&D expenses.

When it's all said and done, though, I believe the semiconductor industry is transitioning away from a valuation philosophy of "as long as you grow, it's all fine" to one more centered around margins and value creation. With that, I believe it is very important for Semtech to not only show solid revenue growth trends, but also that it can translate that growth into long-term shareholder value.

Read the full article here:
Semtech Needs To Translate Expected Growth Into Shareholder Value

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