Maxim Among The First To Deliver A Real Recovery, But Expectations Were Already Steep

“First in, first out” seems to be working out for Maxim (MXIM), as this diversified chip company chose to make hard decisions earlier in the cycle that punished growth at the time, but now leaves the company ahead of many of its peers as the recovery begins. I also like the leverage Maxim has to multiple growth opportunities, including autos, factory automation, data centers, and 5G, not to mention a strong margin profile and clean balance sheet.

Maxim’s beat-and-raise quarter was a welcome sight, but I am a little concerned about the sustainability of the outperformance in wireless. Then again, this is hardly a Maxim-specific issue. The bigger issue for me remains valuation. Multiples are high across the chip sector, all but demanding beat-and-raise quarters to sustain, let alone drive, share prices, but again this is not a Maxim-specific issue. I’d rather own STMicro (STM) at current prices, but Maxim is definitely a name I’d consider on a pullback.

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Maxim Among The First To Deliver A Real Recovery, But Expectations Were Already Steep

Semtech Outperforming As The Pieces Come Together

With stronger than expected results in industrial, handsets, data center, and optical, the pieces of Semtech’s (SMTC) growth story have come together a lot quicker than I’d expected. Add in some operating margin leverage and the shares are up about 15% in just the last three months (and up close to 60% over the last year), handily outperforming the SOX index and peers/rivals like Maxim (MXIM), MACOM (MTSI), Inphi (IPHI), and ON Semiconductor (ON) over those time periods.

I didn’t expect this level of outperformance so soon from Semtech, but I can see why the Street is bullish on the prospects for the second half of the year, given the company’s leverage to data center and optical, as well as improving trends for handsets and the ongoing growth opportunity in Long Range Access (or LoRa). I’m not completely comfortable paying more than 5x forward revenue for Semtech today, those margins are improving and this is shaping up as a relatively rare double-digit revenue growth story with M&A support.

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Semtech Outperforming As The Pieces Come Together

Semtech Has Made Progress, But Really Needs LoRa To Take Off

I wasn’t a big fan of seemingly perennial underachiever Semtech (SMTC) back in 2016, and the path since then hasn’t been entirely smooth. The company has done a little better than I’d expected with revenue (beating my circa-2016 expectations by 3% in the last two years), but adjusted free cash flow has been slow to develop, and the company’s key driver, LoRa, has come in well short of management’s targets from a few years ago.

With a strong move in the shares since the last quarter, the stock’s performance has been slightly better than the SOX since my last update, on par with Silicon Labs (SLAB), and below ON Semiconductor (ON) (and well above Maxim (MXIM) and MACOM (MTSI)), but I don’t feel like I’ve missed much with slightly-better-than-sector performance. I’m more encouraged by what I’ve seen recently in the data center and PON businesses, as well as protection, but a lot is riding on increased uptake/usage of LoRa. I’d also note that while I don’t see tremendous value here, the shares have appeal as a takeout candidate.

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Semtech Has Made Progress, But Really Needs LoRa To Take Off

Renesas Going Through A Rocky Patch, But The Future Prospects Look Undervalued

"Buy the pullback" is one of the oft-used pieces of advice that is easier said than done but can nevertheless be profitable for patient investors. The semiconductor sector has certainly cooled, and Renesas Electronics (OTCPK:RNECY) is likely to see some weak reported results in the near-term, but this looks like a story that has some legs over the longer term.

Renesas is certainly looking at more competition in its core auto semiconductor market, but I wouldn't ignore the strong position it has built for itself in microcontrollers and SoCs, nor the opportunity to benefit from significant growth in semiconductor content in the auto sector. With mid-single-digit long-term revenue growth and low-to-mid teens operating margins, the stock looks undervalued enough today to merit a closer look.

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Renesas Going Through A Rocky Patch, But The Future Prospects Look Undervalued

Data Center Driving IDT Ahead Of New Launches And Revenue Opportunities

While it may just be a slowdown within a bullish up-cycle, many segments of the semiconductor industry have gotten more challenging recently. Investors have gotten nervous about volume growth in smartphones, particularly on the high end, and data center and communications spending has been slower to pick up than expected. Those are all key markets for Integrated Device Technology (or "IDT") (IDTI), but the company is leveraging new product cycles to continue to generate good growth.

Although valuations are generally pretty high around the semiconductor space, there does still seem to be some opportunity left for IDT to go higher, particularly if the strength in computing continues, and the company sees more growth in communications and consumer markets. I would also note that although IDT is probably close to the limits of what it can achieve for near-term margin leverage, the accretion potential to an acquirer makes this a serious candidate to be bought out.

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Data Center Driving IDT Ahead Of New Launches And Revenue Opportunities

Once Overlooked, Microsemi Is Now The Belle Of The Ball

It's been a long, and sometimes strange, trip with Microsemi (NASDAQ:MSCC). It wasn't that long ago when writing positively about this semiconductor company generated a lot of negative feedback from the peanut gallery, but management has stuck to its plan and reshaped Microsemi into a diversified semiconductor company with multiple growth drivers and good margin leverage potential. The market has recognized this improvement too, with the shares up over 130% over the last three years and up more than 50% over the past twelve months.

Now Microsemi is a relatively popular name - it's on multiple sell-side "Top Pick" lists and the stock is in play as an M&A target. I do believe there is a credible case that Microsemi could be a target, if for no other reason than M&A is a reasonable way to drive earnings growth in the semi market today and the recent wave of consolidation has thinned the herd of eligible and worthwhile targets. Given the upside potential of a deal, I'm inclined to hold on to what I have but I will note that it's not really plausible (in my opinion, at least) to validate today's price on a standalone basis.

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Once Overlooked, Microsemi Is Now The Belle Of The Ball

Seeking Alpha: The Market Is Skeptical Toward ON Semiconductor ... As It Should Be

"Under-promise and over-deliver" is popular corporate speak, but apparently not a central part of the operating philosophy at ON Semiconductor (NASDAQ:ON). Although I do think that ON Semiconductor has some good things going for it and has done a respectable job of improving its cost structure, there has been a trend in place here for some time of promising more than is actually delivered.

That's an admittedly harsh opening statement on a company that, on balance, I still like. I wasn't all that fond of the shares back in March (and the price has fallen about 20% since), but the stock's performance relative to Texas Instruments (NASDAQ:TXN), Maxim (NASDAQ:MXIM), and Fairchild (NASDAQ:FCS) hasn't been too bad over the last year (or three years), though NXP (NASDAQ:NXPI) has handily outperformed the group. With this pullback, I think the shares are once again a more interesting prospect, particularly given growth opportunities in wireless, computing, and autos, but for as much as the performance of these shares may be tied to future revenue growth and margin improvements, a stronger sense of credibility from management may be the biggest potential catalyst of all.

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The Market Is Skeptical Toward ON Semiconductor ... As It Should Be

Seeking Alpha: Maxim Has Room To Run A Little Further, But Long-Term Concerns Remain

The market is telegraphing quite a bit of optimism about the chip sector for the start of 2014. Better demand from industrial and auto customers ought to help, as should a comms market driven by China's 4G rollout. As Maxim (MXIM) has exposure to all of those markets, this could be a good first half of the year for this analog chip company and the company's valuation looks a little low relative to its peer group. This may be more of a date than a long-term commitment, though, as the company's outsized exposure to Samsung and high-end smartphones are still causes for concern.

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Maxim Has Room To Run A Little Further, But Long-Term Concerns Remain

Investopedia: Atmel's Investment Case Is Touch And Go

For years bears have been waiting for Atmel (Nasdaq:ATML) to come up with some sort of product to really stand out from the crowd. Now that they have it, the worries have shifted to whether the company may become too dependent on them and risk losing share to a host of would-be rivals. Although Atmel is not the safest pick in the chip space, several potential market rebounds could drive better results in 2012 and 2013.

Good Touch and Bad Touch  
Atmel's maXTouch solutions for touchscreen controllers have definitely spiced up its microcontroller business, though it is not the largest business yet. In this case the name is pretty self-explanatory; maXTouch chips allow for the touchscreen interfaces that are now so commonplace in smartphones and tablets. Atmel has garnered an early lead in this fast-growing market, in part due to technology good enough to get it in eight of the top 10 phones in early 2011.

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Investopedia: Buy Into Atmel's Doubts

As 2011 winds down, it looks as if few, if any, chip stocks will escape the malaise. Cavium (Nasdaq: CAVM) reported a slowdown in its business just a little while ago, and now Atmel (Nasdaq: ATML) has missed its revenue target and issued sharply lower guidance for the next quarter. Although there are plenty of doubts around this company, and more now with the revised guidance, it's hard to make money in slam-dunk stories; risk-tolerant investors ought to consider stepping up and buying this name on weakness.

Hitting a Wall in the Third Quarter 

Atmel announced that revenue rose 15% from last year (adjusting for a spinoff), and was basically flat on a sequential basis, a result that was about 1% shy of the average Wall Street guess. Microcontrollers were fairly strong, up 18% from last year and flat sequentially, with 8-bit showing more sequential strength. Non-volatile memory and RF/auto were both down sequentially, while ASIC showed solid growth, but comprises a small amount of total revenue.

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Investopedia: Are Buybacks A Bad Sign?

In the last decade or so, a common theme has emerged from U.S. boardrooms - when the going gets tough, companies start buying their stock. There are plenty of valid reasons for companies to repurchase their own stock, particularly when markets sell off and valuations drop. On the other hand, buybacks are not a terribly productive use of cash, and investors may be right to worry whether a spate of repurchase announcements in the face of a worsening economic environment is going to make things worse in the long run.

 

Who's Doing The Buying?  

The past few weeks have seen several large share repurchase announcements. Lockheed Martin (NYSE:LMT) and Lowe's (NYSE:LOW) take the cake with announcements of $1 billion and $5 billion plans, respectively. Maxim Integrated (Nasdaq:MXIM) is in for $750 million, Celgene (Nasdaq:CELG) added $2 billion to its plans, Marsh & McLennan (NYSE:MMC) is looking to buy back $1 billion, and Covidien (NYSE:COV) has a $2 billion plan in place.

 

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Investopedia: Texas Instruments Takes A Big Swing

Texas Instruments (NYSE:TXN) had been on something of a roll for a while, gaining share in markets like amplifiers, power management and so on, and getting slots in products like the Apple (Nasdaq:AAPL) iPad. On top of that, deals in the analog chip space are relatively rare as chip architectures tend to be proprietary and there is a lot of market overlap. 

So, of course it stands to reason that TI would do the unexpected and step up with a $6.5 billion bid for rival analog player National Semiconductor (NYSE:NSM). 

The Terms of the Deal  

Under the deal announced late on Monday, TI will pay National Semiconductor shareholders $25 in cash for each of their shares. That represents a 78% premium and a generous valuation. How generous? TI's bid values NSM at a P/E of 20-times and an EV/sales of 4.2 - well ahead of the blended averages of leading players like Analog Devices (NYSE:ADI), Linear Technology (Nasdaq:LLTC) and Maxim (Nasdaq:MXIM). (For more, see Mergers And Acquisitions: Valuation Matters.)
What TI Is Getting  

Why would TI do this deal? With National Semiconductor in the fold, Texas Instruments will have a compelling power management business, particularly as TI has generally done best in the computer and handset markets, while NSM has been stronger in the industrial markets. This is not an encouraging development then for the likes of Maxim or ON Semiconductor (Nasdaq:ONNN). That said, customers will often tap at least two suppliers (one as primary and one as back-up), and there could be some incremental business to be had among those customers who already use TI and NSM and will need a new back-up. 

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Investopedia: Texas Instruments Suggests A Soft Landing In The Works

Figuring out the semiconductor industry is a little like playing one of those games where you are supposed to guess at what the image is as it is revealed a piece at a time. While Linear Technology (Nasdaq:LLTC) started the reporting cycle with a sour note, Maxim (Nasdaq:MXIM) seemed incremental better, and so too now does Texas Instruments (NYSE:TXN). If Texas Instruments is more indicative of the "real" state of the industry than Linear, perhaps the worst of the mid-cycle correction is over. 

A Mixed End to a Rebound Year
As is so often the case, the strength of Texas Instruments' quarterly results depends very much on the frame of revenue. After all, 17% year-on-year revenue growth sounds good - up to the point when it translates into a 7% decline in sequential performance. Analog is TI's biggest segment, and revenue here was up 20% annually and down 4% sequentially, while embedded processing saw a 31% annual increase and 7% sequential decrease. Wireless was comparatively boring, up 1% from last year and flat relative to the third quarter.

Profitability was not quite as positive for TI. Due at least in part to higher capacity and lower utilization, gross margin fell 150 basis points from last year. Although the company did do a solid job of holding the line on operating expenses, the decline in gross margin led operating margin to contract about 200bp on a sequential basis, while rising 170bp from last year after adjusting for a divestiture gain. (For more, see  The Bottom Line On Margins.)

Orders fell 4% from last year and 9% from the third quarter, leading to a 0.89 book-to-bill ratio. While management did say that lead times were back to normal (suggesting that the book-to-bill should have bottomed), it is worth noting that inventory did climb almost $100 million on a sequential basis and stands (on a days sales basis) at a pretty high historical level. 



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Investopedia: Can Maxim Outgrow Its Cycle?

Looking at calendar fourth quarter results so far, there is definitely a little cause for concern about the cyclical slowdown. That puts Maxim Integrated Products (Nasdaq:MXIM) investors in the midst of a bit of a quandary - will product wins in popular consumer products like smartphones, TVs and tablets be enough to overpower cyclical pressures, or is the company just going to go through the same trouble a little later? 

The Quarter That Was
Maxim reported a pretty solid fiscal second quarter. Revenue was down 2% on a sequential basis, but up 29% from last year and a bit ahead of the published average analyst guess. Communications was a standout (up sequentially by 3%), while computers were notably weak - especially notebooks. Profitability was not bad either. GAAP gross margin did improve a bit on a sequential basis, but operating income did fall even after excluding some unusual items. (For more, see The Chips Are Down.)

There were a few concerning items in the details, though. The company reported that bookings dropped 15% on a sequential basis and the book-to-bill was 0.85. Lead times continue to fall and stood at 12 weeks - off a bit from the company's peak of 14, but still ahead of the "normal" level of 8-9 weeks. That is a definite risk factor for the stock - as customers can more easily get the chips they need (and get them on time), they do not need to over-order or carry larger inventories. That in turn leads to order cancellations and revenue stress.

The Road Ahead
Order times are not the only concern for Maxim investors to consider. Texas Instruments (NYSE:TXN) is building a large 300mm fab (which FBR's analyst Craig Berger has called the "Death Star") and that could produce some supply-driven pressure on the sector. Arguably Maxim would be more vulnerable than Linear Technology (Nasdaq:LLTC) and Analog Devices (NYSE:ADI) but it is hardly good news for any supplier other than TI. (For related reading, see Linear's Ups And Downs.)


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Can AMD Save Itself?

“Jump or we push” resignations are always something of a surprise, and the announcement that Advanced Micro Devices' (NYSE: AMD) CEO Dirk Meyer was resigning was certainly not widely expected. Still, given the performance of the company, just how surprised can anyone be?

A Look Back

Mr. Meyer had the top slot since 2008, and he does deserve some credit for at least stabilizing a company that has seemingly always been among the walking wounded. Spinning off GlobalFoundries in 2009 was a logical move, and the $1 billion-plus settlement with Intel was a good move as well (though one that arguably doesn't look so special now that Nvidia (Nasdaq: NVDA) struck an even better deal).

All in all, at least on a surface level, Meyer is leaving the company in better financial shape than he found it. By the same token, he took the position after many years of mismanagement, so he did have the benefit of somewhat low expectations.

Too Little Excitement?

Although I do not know the man, Mr. Meyer strikes me as something of a caretaker CEO. I cannot immediately recall him making any incendiary statements or spelling out any sort of bold vision for the company. In fact, the decision to focus on server chips instead of Fusion, and losing share to Intel in servers anyway, is perhaps reflective of the problem. Mr. Meyer would appear to be a CEO who can fix the obvious problems and restore a company to profitability, but I just don't see where he had a vision to make AMD relevant or interesting again.

Consider this – while AMD was working on spinning off GlobalFoundries and moving into server chips, ARM Holdings (Nasdaq: ARMH) was working with Qualcomm (Nasdaq: QCOM), Texas Instruments (NYSE: TXN), Apple (Nasdaq: AAPL) and a host of others to design the chips that power the smartphones and tablets that are now taking the world by storm. While its true that Intel has also been taken somewhat flat-footed by the change in the market, Nvidia is already there. So it is not as though every old-school chip company was surprised by the move.

All in all, though, the price of Meyer's term is that AMD is still more or less what it used to be – and what AMD used to be was a second-rate chip company forever playing catch-up and trying to convince the Street it had an identity and a vision. Considering how companies like Nvidia, Silicon Labs (Nasdaq: SLAB), Analog Devices (NYSE: ADI), and Maxim (Nasdaq: MXIM) have all managed to reposition, reinvent, or reengineer themselves in recent years, that is a fault that validates the board's apparent decision to force him out.

What Now?

So what's AMD's future? The question of whether AMD can compete with Intel in PCs and notebooks almost seems moot now – particularly with Nvidia getting into the combo chip business as well with a recent licensing deal with ARM. In fact, AMD is now arguably in a position where it HAS to do something radical – the phone/tablet market is undermining that core PC/notebook processor business with or without Nvidia's increased competition.

As for the server business … well, maybe the Bulldozer architecture will make the Interlagos and Valencia chips more interesting relative to Intel. But is AMD going to really stand out against the likes of Cavium (Nasdaq: CAVM) and NetLogic (Nasdaq: NETL) when it comes to investor expectations and enthusiasm?

AMD has some difficult decisions to make. Innovation costs money and the company can't have it both ways – do they want free cash flow or do they want to invest in R&D and stay relevant? Along similar lines, the company could try to take a big step forward (perhaps by trying to acquire Cavium or NetLogic) but that only makes sense if the company is willing to back that up with a long-term commitment to R&D spending and careful attention to customers' needs.

The right move might be a hybrid – figure out how to run the legacy businesses at peak efficiency and wring as much cash from them as possible, and then use that cash to fund the R&D to have the right products in the pipeline for the “next iPhone/iPad”.

As is, there's no reason to be all that excited or optimistic that the company will do this – that certainly isn't consistent with the company's past. Still, I'm curious to see who the board selects as the next CEO and whether that person is willing to lay out a strategy that represents real change for the company. If the AMD of tomorrow is the AMD of yesterday, I'm not the slightest bit interested. But if the new CEO is willing to take a page from Silicon Labs, Nvidia, and Maxim and make some real changes, almost anything could be possible.

I would suggest HOLD AMD shares at this point - at least until a new CEO is named.

2010 - The Year In Chips

While the semiconductor space has fragmented into many sub-sectors that have relatively less correlation with each other, the fact remains that 2010 was still a pretty strong year for chips. Worries about the strength and persistence of the economic recovery and the computer sector weighed on some stocks, but most companies benefited from customers replenishing their inventories throughout the first nine months of the year. 

As is often the case, investors traded these stocks on the basis of guidance and worries that the sector might have peaked in 2010. This is a battle that will be resolved in 2011. The question is whether 2010 was the high water mark in the chip recovery, or is the first half of 2011 just a pause in an overall upward trend and longer recovery cycle?

Smart? Very Smart
The torrid growth of smartphones, and the introduction of tablets, feels like one of the most significant factors for chip stocks in 2010 and going on into 2011. Companies like Broadcom (Nasdaq:BRCM), ARM Holdings (Nasdaq:ARMH) and Atmel (Nasdaq:ATML) saw their stocks do exceptionally well as investors paid up for their exposures to this consumer segment. Conversely, Qualcomm (Nasdaq:QCOM) and Maxim (Nasdaq:MXIM) failed to outperform even though both companies are highly leveraged to these markets. (For more, see The Chips Are Down.)

Networking Paid Off This Year
Within the overall positive performance of chips in 2010, companies leveraged to networking did exceptionally well. Broadcom double-dips here (with the smartphone space), while purer plays like Cavium (Nasdaq:CAVM) and Mellanox (Nasdaq:MLNX) had exceptional years. With ever-greater demands on networks and increasing functionality in chip sets, it looks as though this sub-sector could see another good year of demand from customers like Juniper (Nasdaq:JNPR), F5 (Nasdaq:FFIV) and the like.


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Avago Looks Like A Relative Bargain

It looks like semiconductor slowdown worries are mostly in the past. Looking across the chip space, particularly the analog sector, most of the major players are either at or very near 52-week highs. While Avago (Nasdaq:AVGO) is likewise near its high for the year, investors may nevertheless want to look a little further and see whether this name might offer a relative bargain in this sector. 

An Okay Quarter To Close The Year
Avago's fiscal fourth quarter earnings showed a familiar theme in the chip sector - good year-over-year growth, okay sequential growth and a warning of sequential contraction early in 2011. More specifically, the company reported that total revenue grew 4% on a sequential basis (up 34% from last year), as sales into the wired segment grew 15% from the Q3 while consumer and computing sales dropped 22%.

Profitability fared better, though. Gross margin improved whether an investor looks at the GAAP, non-GAAP or adjusted non-GAAP numbers. The GAAP numbers show a 50 basis point sequential improvement and a substantially better jump from the year-ago level. Avago also reported more positive leverage through the operating and net income lines.

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Is Linear A Canary Or A Duck?

Linear Technology (Nasdaq:LLTC) has long suffered from a decided lack of analyst support and enthusiasm. Despite an extensive record of strong financial performance, the company has never put to rest the doubts that its high margins will be whittled away by the likes of Analog Devices (NYSE:ADI), Texas Instruments (NYSE:TXN), Maxim (Nasdaq:MXIM) and a host of foreign and smaller competitors. 

Now, another worry comes into play - whether or not Linear can maintain its business, and whether customers over-ordered during the early stages of this economic recovery. With Linear looking for a sequential drop in revenue into the last calendar quarter of this year, the question is whether Linear is the canary in the coal mine for broad-based analog chip demand, or simply an odd duck with its own unique ship-ahead problems.

The Quarter That WasAll in all, Linear did more or less as expected in its fiscal first quarter. Revenue rose 6% on a sequential basis, and 65% on an annual basis. Gross margins ticked up sequentially by about 60 basis points, and while reported operating margin fell a bit, adjusted operating margin (excluding a legal charge) would have increased sequentially.


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And Here We Go ... Intel Lowers Guidance

When I saw the news that Intel's (Nasdaq: INTC) stock was halted, my first thought was that we were going to see news that Intel had closed the deal to buy Infineon's (Nasdaq: IFNNY) wireless chip business.

Nope.

Instead, Intel announced a pretty sizable revision to its third quarter guidance. Sighting weak PC sales and inventory issues, Intel cut its revenue guidance by $200 million to $1 billion. Keep in mind, this is about six weeks after the company reported earnings, so things must be getting ugly pretty quickly.

In a nutshell, analysts' worries about the semiconductor space seem to be coming true. This should definitely be a concern for Advanced Micro Devices (NYSE: AMD) and Nvidia (Nasdaq: NVDA) given their reliance on the same PC market as Intel.

A bigger question for me, though, is whether this spreads out into other consumer electronics like smartphones/cell phones, PDAs, and so on. That could suck in Maxim (Nasdaq: MXIM), Broadcom (Nasdaq: BRCM), Atheros (Nasdaq: ATHR), Silicon Labs (Nasdaq: SLAB), Qualcomm (Nasdaq: QCOM) and Marvel (Nasdaq: MRVL), as they all have exposure to various consumer-oriented devices like phones, computers, gaming systems, and so on.

On the other hand, names like Texas Instruments (NYSE: TXN), Linear Technology (Nasdaq: LLTC), Analog Devices (NYSE: ADI), ON Semiconductor (Nasdaq: ONNN), and Microsemi (Nasdaq: MSCC) should all be diversified enough that a decline in consumer electronics would not hurt them too badly. Of course, if this decline in consumer devices is simply a part of a much broader overall economic slowdown, all bets are off. After all, nobody is too optimistic about conditions in industrial markets, enterprise hardware and IT, automobiles, or healthcare right now. 

Now here is the twist - it would not shock me if this news has minimal impact on the sector. After all, analysts have been racing each other to the bottom; everybody trying to get out their own pessimistic story about the next few months of chip sales. So, this could ultimately strike investors as a revision that was not really so bad as feared. Looking at valuations in the sector, it is pretty clear that there was a fair bit of pessimism anyway, so a little bad news may not change things all that much.

What should investors do? Stick with the stocks that they already liked. I have been positive on names like Microsemi, ON, Analog Devices, and Linear before, so I see no real reason to change now. I am even a little positive on Intel as well - I hope they do not overpay for Infineon (assuming they go ahead with the wireless deal as is commonly rumored), but there is probably some long-term value there.

Disclosure - I own shares of Microsemi

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