Now Is the Time to Short Actel

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Includes: ACTL, ALTR, CHRT, HON, LSCC, UMC, UTX, XLNX
by: Richard Davenport

EVENT: STOCK UP 70% OFF NOV. LOWS.

Actel (ACTL) bottomed on Nov. 20 at $6.92 and now trades around $12, an increase of 70%+.

CAUSE: DETERIORATING SUPPLY CHAIN DATA, RISING INVENTORIES.

As our Supply Chain Event Tracker shows, ACTL's supply chain data has continued to deteriorate, with negative data points from customers, suppliers, and competitors. Additionally, ACTL's inventory growth vs sales growth in Q3 was +32.6% (inventories up +24.9% Q/Q; revs down -7.7% Q/Q). Among semiconductor companies, we have counted over 50 US-traded names that warned during the month of December. ACTL wasn't one of them. In fact, on 12.11.08 it reiterated its previous Q4 revenue guidance of flat to down -4% Q/Q ($52.1M, in line with Street expectations of $52.1M), and while this points to relative strength in the current Q, it has no bearing on ACTL's outlook for Q1 and the rest of 2009.

ACTL's end market breakdown is as follows: Industrial 36%, Mil/Aero 36%, Consumer 19%, and Communications 9%. Supply chain data does not point to strength in any of these end markets. The Street is modelling Q1 revs of $52M (flat Q/Q), and while this is in line with historical norms, the economic environment does not support historical norms.

SUPPLY CHAIN EVENT TRACKER. 12.4.08 Customer AVT guides FQ2 revs -2.5% below Street expectations
12.8.08 Competitor ALTR guides Q4 revs -7.9% below Street expectations
12.9.08 Supplier UMC reports Nov revs -18.0% below historical norms
12.9.08 Supplier UMC guides Q4 revs -18.6% below Street expectations
12.11.08 Company ACTL reiterates Q4 revs in line with Street expectations
12.11.08 Competitor LSCC guides Q4 revs -10.4% below Street expectations
12.11.08 Supplier CHRT guides Q4 revs -17.1% below Street expectations
12.11.08 Customer UTX reaffirms 2008 rev outlook; guides 2009 revs in line with Street
12.15.08 Customer HON reaffirms 2008 rev outlook; guides 2009 revs -2.2% below Street
12.16.08 Competitor XLNX guides FQ3 revs -5.0% below Street expectations

IMPACT/ACTION: SHORT CANDIDATE. Given ACTL's rapid price appreciation over the past few weeks, as well as its inventory vs rev growth in the face of deteriorating supply chain data, we view ACTL as a short. In terms of actionable events, we believe these will be numerous over the next several weeks, as companies up and down ACTL's supply chain will continue to post rev results and guidance below Street expectations. We continue to believe that 2009 ests are overstated: as we have written previously, we believe that a best-case scenario for semi Y/Y rev growth is -20%; meanwhile, the Street is modelling a decline of -12.5%, and Gartner recently lowered its est to -16%.

Due to a lack of visibility, companies generally have not provided 2009 guidance, and we have argued for some time that so-called "cheap" tech stocks will not look so cheap once the Street has a better handle on how 2009 will shape up. For more information, see our BizMaps.

Disclosure: no positions