Pericom Semiconductor: Safe to Buy and Hold

Pericom Semiconductor (PSEM) is a high tech value play. The company has a genuine technological business with real sales and income, but also features a lot of cash and investment securities. At yesterday's close of 4.89, it is trading at less than its tangible book value of 7.98. TTM P/E checks in at 8.5. At these prices, it is safe to buy and hold, waiting for the recovery in semiconductors, whenever that may occur. I have had good results investing along these lines, specifically back after the tech crash.

Overview

Pericom specializes in serial connectivity. Their website includes an Investor Fact Sheet (pdf warning). R&D amounts to about 10% of sales and produces 6-8 new products in a typical quarter. They do business with the likes of Hewlett Packard (HPQ) and Dell (DELL). Five year revenue growth has been 18% (GARP too!) and margins have improved in recent years.

It trades just slightly above the per share value of its cash plus short term and long term investments. Cash and investments is in excess of operating capital needs and could be used for a nice special dividend, or to repurchase shares, never a bad idea when a company's share price falls below tangible book. The company has a repurchase authorization outstanding. Acquisitions are possible: management looks at deals as they become aware of them.

Strategy

From the 2Q 08 transcript:

For the last few years, we've focused our efforts on enabling the transition from parallel to serial connectivity in computer, communication, and consumer electronics systems. This has helped us achieve a unique position compared to many other semiconductor companies. We've achieved success so far on providing high-speed serial protocol solutions for digital video, auto-mobility devices, and high-performance PCs and servers, end markets that we believe will continue to grow at a healthy rate.

Given the tangible productivity benefits from faster high-quality connectivity, we believe our products provide cost-effective differentiating solutions to key OEMs. We believe this has been a key factor for our continued growth in the current market.

Growth and Margins

Up to the end of the most recent quarter, management had been able to increase revenues faster than SG&A, meanwhile increasing gross margin. Net income as a percentage of revenue increased from 5.5% for fiscal 2006 to 10.22% for fiscal 2008. Revenues increased 16.5% and 32.7% year over year during the same time span.

Weak Guidance

After reporting a very respectable first quarter 2009, guidance is weak, based on a sudden slowdown in bookings and lack of visibility. This, together with the overall poor performance of the equity markets, tanked the stock. Second quarter guidance works out to revenues of 38 million and EPS of .09, vs. 44 million and .15 for the quarter just ended. Looking back over the punishing 2001-2003 period, it appears management kept expenses in line and R&D intact, so I expect they can manage through the coming downturn: they have the resources.

Target

Over the past ten years, PSEM has always traded at above 1.5 P/B at some point during the year, and is now at a ten year low on that metric. Using P/S, a midpoint target would be 20 per share, using P/B, a midpoint would be 12. Assuming some kind of economic recovery, my two year target would be 12. Under favorable economic conditions, that target would be around 20 per share.

I have opened up a starter position and plan to monitor quarterly, looking for management to control expenses, maintain R&D, and implement their strategy successfully. If and when visibility and outlook improve, or if prices drop without cause, I will attempt to enlarge the position at a favorable price.

Disclosure: Author holds a position in PSEM