Kemet Looking To Specialty Markets And Efficiency Measures To Change Its Trajectory

Selling electronic components is generally a tough business with fierce competition and ongoing price pressure, but companies like Littelfuse (NASDAQ:LFUS) and Amphenol (NYSE:APH) have found paths to prosperity by focusing on margin improvement efforts, prioritizing higher value end-markets, and using M&A to build and shift the business. Kemet (NYSE:KEM) is hoping that a similar approach yields better results for its capacitor business.

Kemet has had a lackluster trajectory - revenue has grown by only about 1% a year on average over the last decade (and really not at all over many quarters), margins have been quite weak, and the company hasn't earned its cost of capital on any sort of consistent basis for a long time. And yet, the shares are up over 150% in the last year as efforts to vertically integrate in tantalum capacitors, shift toward higher-margin specialty markets, and reduce/streamline costs seem to be paying off and improving margins and cash flow. It remains to be seen whether Kemet has improved the business to a point where consistent mid single-digit FCF margins are a reasonable expectation, but if they have, the shares are not unreasonably priced.

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Kemet Looking To Specialty Markets And Efficiency Measures To Change Its Trajectory

Seeking Alpha: ON Semiconductor - If It Stops Getting Worse, It Could Get So Much Better

In Hollywood, asking "How can it get any worse?" aloud is a sure way to get either a comedic or horrific answer in the next scene. In the case of large chip maker ON Semiconductor (ONNN), a lot of things have gone wrong over the past couple of years. In addition to a deal for SANYO Semiconductor ("Sanyo") that just keeps looking worse and worse, ONNN has been hit by both the general slowdown in chip demand and the particularly weak conditions in computing and consumer electronics.

With all of the bad news and adverse developments, it's easy to overlook some positives that could start working in the company's favor and relatively soon at that. ONNN is a top four/top five player in multiple large markets (transistors, diodes, analog), and the company is actively working to move up the value chain. Given the company's low utilization rate and stabilizing Sanyo performance, the company would seem to have significant margin leverage potential - potential that generate free cash flow growth way ahead of revenue growth and support a fair value of $10 or higher.

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ON Semiconductor - If It Stops Getting Worse, It Could Get So Much Better

Cree Not Burning Out Yet

Judging by the early reaction in the market, LED specialist Cree (Nasdaq:CREE) is going to take a hit in the wake of its fiscal fourth-quarter earnings and forward guidance. At first blush this may look like a case of Wall Street saying that nothing is ever good enough, but a quick glance at the valuation reveals a more typical growth stock profile. This, then, is the tradeoff for investors - the ride up from below $15 in late 2008 to the recent high near $80 was a blast, but with that moves comes extremely aggressive expectations and hair triggers on the sell orders at the first hint of trouble.

The Quarter That Was
Simply put, there just are not very many companies growing like Cree right now. Revenue jumped 79% this quarter to $265 million, with XLamp LED components once again proving to be a strong driver. Impressive as that growth is, it was basically spot-on for what analysts had forecast for the company. Once again, this is a company that is doing great, but where the expectations are so high that a lot of institutional investors are going to turn around and ask "what else ya got?"


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