Silicom Limited (SILC) engages in the design, manufacture, marketing, and support of connectivity solutions for a range of servers and server based systems. The firm has several growth engines including Information Technology's return to growth, the march to 10GB per second technology, a large and growing base of OEM customers that includes most of the market-leading players, staged launch of new products, and a strong OEM business model which limits operating expenses. SETAC, the firm's newly patented Server to Appliance Converter, which combines the best of standard servers with hardware appliances has been gaining acceptance in the past three years and is driving revenues and the stock price.
On February 19, 2013, the firm announced that it has launched a new family of Intelligent Nano-Second Time-Stamping (NICS), a breakthrough enabler of next-generation network monitoring in Big Data environments, and that it has already secured an immediate Design Win for the product line's first adapter. The firm will be recording its first Time Stamp revenues shortly, and projects a rapid sales ramp-up to reach annual revenues of $15 to $20 million within a few years.
In today's faster and more inter-connected networks, time-stamps at the packet level are prerequisites for effective analysis of network performance-related issues such as latency and jitter, as well as critical enablers of e-trading, digital forensics and other time-sensitive applications.
Dividend Policy and Financial Flexibility
In mid-January 2013, the company's Board of Directors adopted a policy for distributing dividends, subject to all applicable laws, where each year Silicom will distribute a dividend of up to 50% of its annual distributable profits.
It should further be noted that this was Silicom's highest ever cash level, which demonstrates to both its existing customers as well as new potential customers that the company can meet all their needs and provide them with support over the long term.
Furthermore, the improvement of assets provides the company with a substantial level of working capital and financial flexibility, placing Silicom in a position of strength and stability, enabling the company to continue to invest in its business as well as take advantage of opportunities as they arise.
Management feels more confident than ever about its ability to continue its growth over the short and long term and believes that the company is ideally positioned to continue its progress in step with its fast-growth target markets.
With strong demand for all of the company's product line, exciting strategic wins with some of the industry's most important players and an extensive pipeline of potential sales, management believes that Silicom has never been better positioned and remains very optimistic with regard to the company's future potential.
We feel Silicom should be valued by its cash plus business operations. With cash and liquid assets of $8.12 per share, plus the company's business operations value based on 14.5x our 2013 EPS estimate, this gives us a $30.00 company value.
Looking at it another way, we see the SETAC and NICS technology driving the company's growth over the next several years.
Two Stage Free Cash Flow to Equity Model
FCFE = Net Income - Net Capital Expenditure - Change in Net Working Capital + New Debt - Debt Repayment
- The company is expected to grow at a higher growth rate in the first period.
- The growth rate will drop at the end of the first period to the stable growth rate.
Rationale for using the Model
As new products are introduced to new customers, we expect the company to grow at a higher overall rate than the industry. As these products mature and the company faces more competition, we expect the growth rate to level off.
Weakness of the Model
As you add more layers to the model, it is more sensitive to the assumptions you make. The growth may look more "lumpy" than we have in the model.
We used the following inputs:
- An 8-year period with an earnings growth rate of 17.0% (average forecast) and a discount rate of 13.8%.
- A continuing period assumed to go on forever, with earnings growing at 5% and a discount rate of 9.56%.
With these inputs we arrive at a target price of $30.00.