Semiconductors Turn Profitable, Stocks Get Cheaper

by: Daniel Long

The last year has been a roller coaster ride for stocks in general, but scarcely has it been more dramatic than in the semiconductor space. Over the past three months, one group of small integrated circuit, broad line and specialized semiconductor stocks has had an especially harrowing ride, losing half of their value after doubling during the trailing twelve months.

Meanwhile, these companies have turned earnings positive over the past quarter or two. Valuations coming into existence may have contributed to the adjustment, but the recent sell off in equities as a whole has really taken its toll on these issues, possibly making them cheap growth opportunities.

LSI Corporation (NASDAQ:LSI-OLD), which has around 650 million shares outstanding, lost 2.5 billion in 2007, 600 million in 2008, 47 million in 2009 and has now actually earned 22 million in the first quarter of this year. Despite the turn around, the stock now trades at a fifty two week low. The P/E based on the recent earnings is a little high, but a forward P/E of 7.3 is below the specialized semiconductor industry average. The company has a billion dollars, or $1.55 per share in cash and only 350 million in debt. All segments of the company saw revenue increases last quarter with Storage Systems leading the way at 40%. The company says the increase is due to a recovery from market weakness seen in 2009.

Integrated Device Technology, Inc. (NASDAQ:IDTI) has flirted with profitability in the past, but managed to earn a slightly more substantial 40 million last year or 24 cents per share. With only 162 million shares outstanding, the company has a very solid balance sheet, with 2.11 per share in cash, and a book value of 3.73. This stock is also trading at a 52 week low, likely due to their profits coming on decreasing revenues. The flip flop in revenues and profits, however, was from making structural changes to the business that included several acquisitions and divestitures into supposed faster growing portions of the communications, computing and consumer electronics end markets. Revenues did increase in the second and third quarters of last year as the economy slowly recovered. Their fourth quarter, which has shown a sequential drop off in the past, saw a less than typical seasonal decline last year directly due to the structural changes made. A P/E of 20 and forward P/E of 8 is well below the broad line semiconductor industry average of 25.

Atmel Corporation (NASDAQ:ATML), another broad line semiconductor, has also seen increasing revenues over the past year coupled with increasing profit margins. Last quarter, the bigger profits finally resulted in the company's first net income since 2007. The stock has performed a little bit better than the other three in this story and is currently within 25% of a 52 week high. The premium may stem from the company's profit increases seeming more sustainable. They have done a little bit of restructuring with respect to market currents as well, but Atmel has mostly taken the head count reduction approach, hopefully becoming leaner and meaner. The company's microcontroller segment has led the way driving revenues up 28% from the first quarter of last year on improved global conditions increasing demand. A slight increase in profit margin was seen primarily from the increased productivity inherent to higher production levels. The balance sheet touts a half a billion in cash on around half a billion shares outstanding with only 84 million in debt. The stock has yet to sport a P/E, but they have been generating cash for a couple of years with cash flow accelerating to 70 million last quarter. A forward P/E of 12 may be conservative and plenty of value may still remain in the stock, especially with the recent pullback.

PLZ Technology Inc. (NASDAQ:PLXT) is the smallest of the four companies and has a tiny float of only 22 million shares. The stock is right in the middle of its 52 week range and has seen the same pattern as the others with a steep climb in the later part of last year followed by a steep decline over the last three months. Despite its small size, PLX has an impeccable balance sheet with $1.00 per share in cash and almost no debt. As profits have come online over the past couple of quarters, little or no dilution has allowed shareholder equity to increase sequentially. What is particularly interesting about this company's recent success is that as industry conditions have improved, PLZ has not been able to keep up with demand. The supplier capacity constraints are expected to continue into the second quarter of this year, making for critical decisions going forward with the potential for unlimited growth. Integrated circuits as a whole have a P/E of 36. This company needs one more quarter of net income to get a positive P/E, and similar earnings to the last two quarters would bring the P/E online at just 8. Another similar quarter after that would bring it down to just 4 or 5 using today's price and share count.

All of these stocks have been heavily shorted over the last few months with ATML currently seeing the smallest percentage of short interest. This seems to be a function of more volatility in the Technology sector leading to more enticing percentage swings as the overall market has declined. Semiconductors in particular have offered plenty of volatility and will likely rise more quickly when things turn around in the markets again. These four stocks, all of which have recently started generating income and are heavily shorted, are positioned to outperform even their semiconductor peers.

Disclosure: Unbiased, no positions