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In your search to identify chip companies with longevity in top-line growth, a good way start may be to weed out those that show troubling trends. To help, we focused on 2 statistics from the balance sheet, namely the growth in receivables, and inventories.

Although receivables are considered to be an asset, it represents the portion of revenue not yet collected, so it becomes a risk when receivables grow and revenues decline. We looked through more than 50 balance sheets to find those with negative trends in revenue relative to accounts receivable, with slower growth in revenue year-over-year than growth in accounts receivable, as well as receivables comprising a larger portion of current assets.

We then moved to looking at growth in quarterly revenue slower than growth in quarterly inventory year-over-year. We also looked for companies with quarterly inventory increasing as a percent of current assets.

When revenue is growing slower than inventory, it may indicate the company is having trouble selling its inventory - although this might just indicate inventory building or a change in sales policies.

The List

We were left with 3 companies on our list. All have troubling accounting trends.

Click play below for the change in quarterly sales of the three semiconductor companies on our list.

Do you think these stocks will survive in a competitive environment? Use this list as a starting point for your own analysis.

1. Advantest Corp. (ATE): Manufactures and sells semiconductor and component test system products, and mechatronics-related products.

  • Market cap at $2.71B, most recent closing price at $13.57.
  • Revenue grew by -19.77% during the most recent quarter ($24,628M vs. $30,695M y/y). Accounts receivable grew by 31.83% during the same time period ($23,226M vs. $17,618M y/y). Receivables, as a percentage of current assets, increased from 14.16% to 21.15% during the most recent quarter (comparing 3 months ending 2012-12-31 to 3 months ending 2011-12-31).
  • Inventory grew by 3.93% during the same time period ($34,629M vs. $33,320M y/y). Inventory, as a percentage of current assets, increased from 26.79% to 31.53% during the most recent quarter (comparing 3 months ending 2012-12-31 to 3 months ending 2011-12-31).
  • Accounting trends aren't the only thing troubling this stock. The company's earnings growth looks weak, with EPS growing by -170.29% over the last year. This is considerably weaker than competitors like KLA-Tencor Corporation (EPS growth over the last year at -4.73%) and ASML Holding NV (EPS growth over the last year at -20.90%).

2. Skyworks Solutions Inc. (SWKS): Offers analog and mixed signal semiconductors worldwide.

  • Market cap at $3.92B, most recent closing price at $20.53.
  • Revenue grew by 15.23% during the most recent quarter ($453.72M vs. $393.74M y/y). Accounts receivable grew by 26.7% during the same time period ($252.15M vs. $199.01M y/y). Receivables, as a percentage of current assets, increased from 23.24% to 28.03% during the most recent quarter (comparing 13 weeks ending 2012-12-28 to 13 weeks ending 2011-12-30).
  • Inventory grew by 29.3% during the same time period ($229.53M vs. $177.52M y/y). Inventory, as a percentage of current assets, increased from 20.73% to 25.52% during the most recent quarter (comparing 13 weeks ending 2012-12-28 to 13 weeks ending 2011-12-30).
  • Despite this, Skyworks Solutions has an encouraging DuPont breakdown suggesting its sources of profitability are strong and improving: MRQ net profit margin at 14.65% vs. 14.51% y/y. MRQ sales/assets at 0.211 vs. 0.206 y/y. MRQ assets/equity at 1.107 vs. 1.151 y/y.

3. Lattice Semiconductor Corporation (LSCC): Designs, develops, manufactures, and markets programmable logic products and related software.

  • Market cap at $600.44M, most recent closing price at $5.20.
  • Revenue grew by -6.11% during the most recent quarter ($65.88M vs. $70.17M y/y). Accounts receivable grew by 26.93% during the same time period ($46.95M vs. $36.99M y/y). Receivables, as a percentage of current assets, increased from 12.3% to 16.34% during the most recent quarter (comparing 13 weeks ending 2012-12-29 to 13 weeks ending 2011-12-31).
  • Inventory grew by 18.54% during the same time period ($44.19M vs. $37.28M y/y). Inventory, as a percentage of current assets, increased from 12.4% to 15.38% during the most recent quarter (comparing 13 weeks ending 2012-12-29 to 13 weeks ending 2011-12-31).
  • Investors might be interested to learn that the firm's share price is lagging behind its EPS trends: The EPS estimate for the company's current year increased from 0.08 to 0.1 over the last 30 days, an increase of 25%. This increase came during a time when the stock price changed by 16.45% (from 4.68 to 5.45 over the last 30 days).

*Accounting data sourced from Google Finance, EPS from Yahoo! Finance, all other data sourced from Finviz.

Source: 3 Semiconductor Stocks With Troubling Accounting Trends