Microsemi Finds Its Last Deal

Management at Microsemi (MSCC) is known for commenting that in semiconductor M&A, "You buy until you get bought." There have been rumors off and on about potential bidders circling Microsemi for a little while now, and the executive management's compensation plan was certainly structured to reward a deal. Now Microsemi finally found its buyer - Microchip Technology (MCHP), a seasoned semiconductor M&A veteran that should reap meaningful revenue and cost synergies from the deal.

Given the deal price, I don't think Microsemi investors have a compelling need to stay to the very end; a rival bid is always possible, but the price offered isn't such that I think another bid is highly likely. Pre-market indications are that Microsemi won't trade up to the full bid price just yet, though, so Microsemi investors can at least get paid a little for waiting unless and until they have a better idea.

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Microsemi Finds Its Last Deal

Lattice Semiconductor Looking To Reach That Next Level

Lattice Semiconductor (LSCC) has some meaningful operational challenges left to overcome, not the least of which are pushing out ASIC/microcontroller companies for design wins and leveraging an operating expense structure that is bloated relative to the revenue base. The company is not without opportunity, though, as Lattice's low-cost lower-power FPGAs are winning slots across communications, computing, industrial, and auto end-markets, with future opportunities in so-called "edge" applications like machine vision, artificial intelligence, and AR/VR.

I think investors are right to remain skeptical about Lattice's standalone potential, particularly given that double-digit revenue growth has often been a difficult bar for the company to reach and that it is difficult to drive attractive operating leverage with a relatively small revenue base. Even so, the standalone potential still suggests some undervaluation, and I continue to believe that Lattice could draw a bid of $7 (or more) from a company that wants its FPGA and mmWave technologies.

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Lattice Semiconductor Looking To Reach That Next Level

Silicon Labs' IoT Energizer Bunny Keeps Going

Silicon Labs (SLAB) continues to leverage its opportunities in the fast-growing IoT market, and that continues to drive good revenue and profit growth for this relatively small semiconductor stock. Silicon Labs has moved aggressively, largely through M&A, to acquire a strong portfolio in wireless (especially mesh networking and connectivity) technologies, giving it a strong position in home/consumer IoT and allowing it to "punch above its weight" relative to some of its much larger rivals.

While I continue to expect good things for SLAB's IoT business, and I believe the Infrastructure business can leverage growth in optical and 5G deployments, the valuation is not forgiving. Growth and momentum investors likely won't care about the valuation, but with the stock trading at close to five times forward revenue, it may be challenging for the company to grow fast enough to substantially expand that multiple.

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Silicon Labs' IoT Energizer Bunny Keeps Going

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

Renewed M&A Chatter Outweighs An Okay Quarter For Microsemi

Microsemi's (MSCC) CEO made a statement not so long ago that has been repeated more than a few times recently - in the semiconductor world, you're buying until you get bought. Buyout chatter is once again swirling around Microsemi, and a deal price could easily exceed $70 for this diversified player. In the meantime, though, the company's performance continues to be a little mixed - not actually bad, but not providing the beat-and-raise momentum that investors typically want to see.

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Renewed M&A Chatter Outweighs An Okay Quarter For Microsemi

Lattice Semiconductor Has To Get Back To Business As Usual

After around a year of speculation and worry, Lattice Semiconductor (LSCC) finally got resolution on the $8.30/share Canyon Bridge takeout offer, as an executive order from President Trump blocked the deal on security grounds after a recommendation from the Committee on Foreign Investment in the United States. This decision wasn't exactly a surprise, as the company had multiple go-arounds with the Committee (including two re-filings), and the shares were down about a quarter year-to-date.

Lattice has a lot of work to do. Guidance and context have been lacking, as management elected not to host conference calls while the Canyon Bridge deal was pending, but revenue and gross margins have been choppy. On the other hand, the company's IP and capabilities in low-power programmable logic devices (including FPGA) and app-specific standard products have value, and the company's cost structure could offer meaningful (and attractive) synergies for the right acquirer.

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Lattice Semiconductor Has To Get Back To Business As Usual

Microsemi Delivering On Its Execution Promises

In my opinion, Microsemi (MSCC) is doing a good job of laying to rest whatever lingering arguments there were from bears that this company is/was “just” a serial acquisition story. Since the large PMCS deal, Microsemi has been executing on its synergy/cost-cutting targets, and the company continues to march toward its long-standing 65/35 gross margin and operating margin goals. What's more, the company is doing a decent job on revenue as well, with new products and market share gains helping to solidify the bull case.

Microsemi shares haven't done very well since my last update (down about 7% and meaningfully underperforming SOX), but then, I did think the share price was demanding back in January and that buyout expectations were a big part of the story. While a buyout of Microsemi is still a possibility (and perhaps even likely depending on your time frame), the quarter-by-quarter execution story isn't going to be so exciting, and particularly so when the company isn't leveraged to buzzy areas of the chip sector today like autos and IoT. With the shares now offering a little upside relative to my fair value estimate, they could be worth a look and particularly so, if the market/shares were to sell off again.

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Microsemi Delivering On Its Execution Promises

'Steady As She Goes' For Microsemi

Microsemi (NASDAQ:MSCC) has some good things going for it. As a very large (if not the largest) supplier of chips to the defense industry, the company stands to benefit from spending growth, and it is seeing good growth in higher-margin product lines acquired in its buyout of PMC-Sierra. What's more, content is increasing in its commercial aviation business, the satellite market is finally looking good again, and the 100G roll-out should support its optical components business.

That's all fine, but Microsemi's shares aren't cheap on a standalone basis, and I'm not entirely sure how the market will react to a "steady as she goes" quarter and guidance with no real news on the M&A front. There are still multiple potential bidders out there that could acquire this company at a meaningfully higher price and still reap attractive earnings accretion, but relying on M&A to support a valuation is at best risky. While I'm still a willing holder of these shares (largely on the prospect for a bid), it's harder to recommend that new buyers come in unless they are comfortable with the risk/reward trade-off between a firm bid and M&A speculation evaporating.

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'Steady As She Goes' For Microsemi

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

Execution Remains ON Semiconductor's Biggest Opportunity ... And Its Biggest Risk

While I thought ON Semiconductor (NASDAQ:ON) was undervalued back in February, the company's history of iffy execution relative to past margin targets and the cyclical weakness in the analog chip space were offsetting concerns. The shares are up almost 50% since then, though, which is about 10% better than the performance of the SOX over that same time, not to mention Texas Instruments (NYSE:TXN) and NXP (NASDAQ:NXPI) (though STMicroelectronics (NYSE:STM) was quite a bit closer).

Investors are certainly feeling better about the health of the chip space, and metrics like lead times would seem to support that. With ON, there's also above-average potential to grow on the back of increasing content in autos, phones, and computers. Even more significant for ON, though, is the potential to drive better margins (where the historical record is admittedly mixed) and drive real synergy from the upcoming merger with Fairchild (NYSE:FCS).

I come up with a wide range of potential values for ON Semiconductor and that seems appropriate given the confounding mix here of the potential to do better and the historical realities of the company's performance. Better days are certainly possible… but then, so too is an "Atmel (NASDAQ:ATML)-like" outcome of years and years of frustrating performance. My core DCF fair value (including Fairchild) is around $10.50 now, but there is definitely potential into the mid-to-high teens if management truly can maximize its growth and margin opportunities.

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Execution Remains ON Semiconductor's Biggest Opportunity ... And Its Biggest Risk

Efficiency Trumping Growth At Microsemi For Now

As the larger semiconductor industry continues to bump along with little-to-no organic growth, Microsemi (NASDAQ:MSCC) too has found its organic growth opportunities somewhat limited in the near term. The good news, though, is that the company has been making real progress with cost-cutting and debt repayment, putting it in a good position to reap meaningful operating leverage and profit growth when underlying demand improves.

Microsemi's quarter was pretty nearly on target with my model, so my post-earnings changes aren't significant. The shares have done alright over the last year, matching the SOX index and beating the major indices, but I don't see major upside left based on the fundamentals. I do think there is a possibility that the growth outlook improves toward the end of the year (and higher revenue drives a higher fair value), but with a 25% move since my last article, I regard this more as a "quality hold" to buy on pullbacks than a must-buy at today's price.

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Efficiency Trumping Growth At Microsemi For Now

Seeking Alpha: When The Dust Settles, Microsemi Should Continue To Stand Out

Microsemi Corp. (NASDAQ:MSCC) hasn't done that well since my last update on the company. While the shares were at least up in that intervening period, they've underperformed the PHLX Semiconductor Index by a little and particular names like Texas Instruments (NASDAQ:TXN), Semtech Corp. (NASDAQ:SMTC), and Silicon Labs (NASDAQ:SLAB) by a whole lot more. To a limited extent, maybe this is just "Microsemi being Microsemi" - I've owned and/or followed this name for a long time, and it always seems to zig when others zag. On the other hand, investors may be legitimately concerned about the level of debt the company has to manage now as well as the uncertainties regarding revenue, margins, and cash flows as the company moves through its initial stages of integrating PMC-Sierra.

My post-earnings model adjustments lead to a lower fair value, which is bad, but I still believe the shares are undervaluing what can be a strong mid-teens FCF growth story for many years to come. With a fair value range from the high $30s to the low $40s, I still think these shares offer enough upside for investors to consider.

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When The Dust Settles, Microsemi Should Continue To Stand Out

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.

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Semtech Needs To Translate Expected Growth Into Shareholder Value

Seeking Alpha: Microsemi Bigger And Better, But Has Work To Do

Microsemi (NASDAQ:MSCC) won the bidding competition for PMC-Sierra in 2015 and closed the deal early in January. Now the hard work really starts. While PMC-Sierra brings attractive diversification, growth potential, and expense synergies, it falls to Microsemi management to prove that they can not only successfully integrate the deal (something they have a lot of experience with), but fully leverage the growth opportunities that PMC-Sierra was building towards before the deal.

I believe that Microsemi will get the job done and emerge a better, stronger, faster-growing company after this deal. This deal pushes my modeled fair value on Microsemi into the low $40's, and I think investors will pleased to see the company leverage growth opportunities in defense, aerospace, and communications while many chip companies try to navigate through a weaker smartphone and industrial environment.

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Microsemi Bigger And Better, But Has Work To Do

Seeking Alpha: Is Microsemi Courting The Winner's Curse?

I've written pretty regularly on Microsemi (NASDAQ:MSCC) for Seeking Alpha, and this has long been a semiconductor stock that I've liked (and own in my own portfolio). Along the way, I've often mentioned that additional M&A felt like a "when, not if" question given Microsemi's past success in using deals to broaden its product, market, and technology exposures. I wasn't expecting something quite as dramatic as the company's bid for PMC-Sierra (NASDAQ:PMCS), but this is a deal that otherwise fits Microsemi's pattern of diversification, cost synergy, and market expansion.

I believe that PMC-Sierra can be a good deal for Microsemi, but I openly acknowledge that Skyworks (NASDAQ:SWKS) will prevail in the end if that company decides that it simply cannot afford to let PMC-Sierra slip away. I also believe, though, that Microsemi has more to gain in terms of synergies and market diversification. Last and not least, while Skyworks' all-cash deal is definitely a lower-risk proposal for PMC-Sierra shareholders, Microsemi's offer appears to me to give PMC-Sierra shareholders more long-term upside.

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Is Microsemi Courting The Winner's Curse?

Seeking Alpha: Microsemi Executing Its Model To Good Effect

Going its own way seems to still be doing some good for Microsemi (NASDAQ:MSCC), as this consistently off-beat semiconductor company appears to be better-positioned than many of its rivals for the near term. With good leverage to relatively healthy commercial aerospace and defense end markets and modest exposure to weaker areas in industrial, PCs, or handsets, Microsemi should have a decent backdrop against which to continue driving long-promised margin improvements.

Although I don't personally value share buyback announcements all that highly, Microsemi has been improving its cash flow generation and continues to trade below what I believe to be its fair value. Given the stock's strong run of relative outperformance, though, the contrarian call may no longer be to prefer Microsemi, but rather to take another look at names like Qorvo (NASDAQ:QRVO), Atmel (NASDAQ:ATML), and Linear (NASDAQ:LLTC) that haven't done as well.

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Microsemi Executing Its Model To Good Effect

Seeking Alpha: Microsemi Offers A Buy-The-Dip, But Wireless Is A Concern

The market certainly didn't like what it saw and heard from Microsemi's (NASDAQ:MSCC) fiscal second quarter results, as seen in the nearly 10% selloff on Friday. While weakness in the wireless sector is a concern and Microsemi's valuation wasn't exactly undemanding, I think this may be shaping up as a buy-the-dip opportunity for investors looking for good below-the-radar GARP stories in semiconductors.

Microsemi is looking to make significant content inroads in commercial aerospace and satellites, while continuing to benefit from a strong position in defense and a growing presence in FPGA. Add in the potential to leverage its timing expertise into the auto and industrial automation verticals, and there is worthwhile long-term potential here. I've changed little in my model after this quarter, and my fair value remains in the mid-$30's.

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Microsemi Offers A Buy-The-Dip, But Wireless Is A Concern

Seeking Alpha: More Of The Same From Microsemi ... And That's Just Fine

As chip companies go, Microsemi (NASDAQ:MSCC) generally flies under the radar while executing on a fairly predictable list of corporate priorities. Between last week's analyst day and the not-so-surprising announcement of another acquisition, management has showed yet again that it's sticking with a script that has served the company relatively well.

I believe that the arrow is still pointing up for this company and this stock. Management spoke of improving backlogs in defense, communications, and satellites and reiterated its goal of 60% gross margin and 30% operating margin by the end of fiscal 2016. Adding in the contributions of Vitesse (NASDAQ:VTSS), the shares are still modestly undervalued and if management is able to drive better synergy from this deal (particularly in terms of product development/growth), addition upside is still in play.

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More Of The Same From Microsemi ... And That's Just Fine

Seeking Alpha: Is The Latest Stumble An Opportunity At Altera?

Altera (NASDAQ:ALTR) shares have gone nowhere fast. After a run that saw the shares double from May of 2010 to May of 2011, the shares have spent most of the following four years chopping around between $30 and $40. It hasn't really gone all that much better for Altera's chief rival, Xilinx (NASDAQ:XLNX), either - the shares haven't shown the same choppiness, but the five-year returns are almost identical.

I liked the shares around $34 back in June of 2014 and they did reach $38 before disappointing guidance and growing concerns about the health of the telecom/wireless business sent them back below the $35 midline. While I do think the shares are undervalued today, investors need to appreciate that the competitive dance with Xilinx is unlikely to ever result in a clear winner and that new entrants into the market could eventually chip away at market share and margins. I still like Altera relative to a lot of the analog players, but the stock likely needs the company to post strong margins in the second half of 2015 and no further pushouts of the 14nm plans to break out above the high $30's.

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Is The Latest Stumble An Opportunity At Altera?

Seeking Alpha: Despite Some Challenging Markets, Microsemi Continues To Move Forward

This is starting to shape up as a disappointing quarter for semiconductor companies (Maxim (NASDAQ:MXIM), Linear (NASDAQ:LLTC), and Skyworks (NASDAQ:SWKS) not withstanding), so I suppose that ought to temper some of the disappointment with Microsemi's (NASDAQ:MSCC) in-line December quarter and soft guidance for the next quarter. On a more positive note, management is starting to see restructuring/cost reduction efforts pay off in margin leverage and the company's book-to-bill remains above 1.0x.

I continue to believe that Microsemi remains overlooked and undervalued. The company is looking to farm its legacy discrete business for margins and cash flow, while driving growth from newer businesses like timing and FPGA where the company's addressable markets and market share appear to be growing. I continue to believe that fair value on Microsemi shares lies above $30 and that they remain a good buy within the chip space.

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Despite Some Challenging Markets, Microsemi Continues To Move Forward