Sigma Designs (SIGM) took the first big step toward restoring investor confidence today. Sigma CEO, Thinh Tran, bought $2.5 million worth of Sigma stock at a price of $5.50, a whopping 22% premium to the Friday's closing price. This is significant for a number of reasons:
#1 The size of the purchase. $2.5 million.
#2 The purchase premium. 22% over Friday's close.
#3 The seller. Potomac Capital/Eric Singer is left with about 400k shares.
#4 This purchase may show Wall St. this is not the same old Sigma Designs.
#5 Wall St. will have to dig deeper into Sigma and may uncover how much value is really under the surface.
The size of the insider buy is impressive. Mr. Tran makes $551k per year, making the buy 4.5x his annual pre-tax salary. He is a founder of the company and was at the helm when the stock made it to the mid $70s. Surely the run up earned him many millions, but it is still a big buy for any CEO.
The premium of the purchase price is a shockingly bullish move by Mr. Tran. As investors in Sigma, we fully applaud and appreciate him stepping up to the plate with his personal capital. I believe the CEO wanted to accomplish three things.
#1 show the market how much value really exists in the company
#2 prove his personal commitment to Sigma Designs
#2 hasten the exit of Potomac Capital to remove the overhang
Potomac Capital has been a seller of Sigma's stock since August of 2013. Eric Singer's firm owned at least 1.5 million shares at their peak position and he made his way to Chairman of the Board of Directors. His efforts as an activist and Chairman pushed the company to 3 sequential quarters of profitability. The stock price has responded very little to his efforts. After reporting very good Q2 earnings, Potomac dumped about 1 million shares into the stock rally, effectively stopping any appreciation (Raging Capital was also a major seller). I do not understand why he would choose to sell now as the business has improved demonstrably but the stock has reacted little. My conjecture would be that his goal was to sell the company and he could not get it done in his investment time horizon.
It would appear that he is very close to closing out of his position and I would guess Potomac is using the volume in the stock today to finish off selling before the tax loss deadline later this week. I believe once the pressure of Potomac (and possibly any other tax loss sellers) abates the stock is going to rip higher.
Starting on January 2nd the company will commence a $20mm stock buyback. The purchase premium paid by the company CEO telegraphs to the market where the CEO values the shares. We can expect that the company will be aggressively buying under the $5.50 range. With the company's current tangible book value at about $3.15, the market is assigning $47mm of value to the ongoing operations of the company. This is undervaluing the parts of the business significantly.
The company has four business lines and currently all four are at different stages within their product cycles.
-Set Top Box is expected to ramp in Q2 and Q3 of 2014 as design wins procured over the last year begin to roll out to consumers. This industry is very competitive but Sigma Designs has shown the ability to compete with the likes of Broadcom (BRCM) and Marvell (MRVL). The design wins of 2013 will be very accretive in 2014.
-DTV was purchased out of the Trident bankruptcy last year. This business we believe to be losing money and hope the company will explore alternatives for divesting it. This is the biggest drag on profitability.
-Home Networking at Sigma is primarily the G.hn standard of products. These products allow the home or commercial building to be networked via existing wires (power A/C lines, coax, or phone lines). It is used commonly for video (video surveillance), whole home DVR, and high speed internet. This business is expected to remain fairly flat in 2014.
-Home Automation is the most exciting business at Sigma. Z-wave allows nearly anything in your home or business to be controlled by your cell phone or computer (Z-wave's competitor is ZigBee by Texas Instruments). Sigma owns the IP to Z-Wave. Z-wave is the wireless RF standard that has been chosen by AT&T Digital Life, ADT Pulse, Verizon, Jasco (a unit of GE), Farko, Honeywell, Kwikset, Leviton, LG, and many others. Z-wave is the technology to power everything seen in the popular AT&T Digital Life commercials running in many markets. Sigma not only makes the chips for all Z-wave devices but also licenses the technology and software to make those devices. I believe the margins for Z-wave business are in the high 60% or low 70% range, way above industry average for chips. The licenses revenue is 90%+.
A search on HomeDepot.com returns 30 Z-wave products, Amazon has 12,000 (many of the same product sold by different vendors, but still a large number), and a search for "AT&T Digital Life" on Google returns 1.5 million pages.
In 2014, I expect the company will do $25-$30 million of Z-wave sales and around $12-$15 of license revenue. This business line alone should be worth $150-$200 million considering it is the standard for the top players in home automation and the gross margins are so strong. Recent IPO, Control4 (CTRL), showed the market's strong appetite for home automation companies at large multiples.
If Wall St. is finally ready to take a look back at Sigma Designs they are going to like what they find. The insider buy, the buyback, and the fundamental value of the business make this stock a gift at $4.55 today. I expect the stock to trade back to the mid $5s or higher in the coming month.