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Summary

  • EBITDA break-even of~$33 million a quarter should occur in Q3-Q4 2014 when all the new design wins are ramping.
  • Cellular PA, WiFi infrastructure and WiFi FEICs design wins announced this month for Samsung, Huawei, ZTE, Coolpad, Innos and others.
  • A price-to-sales ratio of .67 is currently 4 times less than PA competitors indicating stock is significantly undervalued compared to peers.

Anadigics (NASDAQ:ANAD), the maker of radio frequency products for cellular, WiFi and infrastructure, has had a rough 2 months dropping nearly 50% in value. This has left the company with a ridiculously low market cap of ~$90 million and a price-to-sales ratio of .70 signaling undervaluation. For those familiar with the checkered past of the company, it is not surprising that investors are taking a wait and see approach, sending the stock lower. However, in my experience this is when one can make significant money investing. The stock has dropped down in the dollar range a few times in the last few years, each time rebounding and doubling in price. It is important for investors to realize that Anadigics is a much better investment now than it has been in a long time. For example, in 2012 the stock was over $3 a share and losing nearly $15 million a quarter. Since then, the company has done a commendable job of cutting costs and maximizing product mix while continuing to innovate and release best-in-class products. It is estimated that EBITDA break-even has now been reduced to ~$33 million a quarter, which should occur in Q3-Q4 when all the new design wins are ramping. To put it in perspective, the last time Anadigics turned a profit was in 2010, the break-even mark was ~$50 million and the stock traded in the $4-8 range.

Investors in small cap semiconductor stocks are familiar with the product cycles and how they can drastically impact a company's revenue. This was evident in 2011 when Anadigics lost the Research in Motion (RIM) BlackBerry business because they couldn't meet a power amplifier (PA) design deadline, dropping quarterly revenue from $60 million to $30 million. Whereas, larger companies with billion dollar revenues like RF Micro Devices (RFMD) and Skyworks (NASDAQ:SWKS) don't feel much of an impact when design wins come and go. For a company like Anadigics these wins have significant effects on revenue growth. In the last couple months, Anadigics has been accumulating significant design wins which should allow it to surpass the magical $33 million a quarter figure. Despite the false rumor that Anadigics was left out of the new flagship Samsung S5 which initially sparked the stock sell off, Anadigics indeed secured the PA socket for the Samsung Galaxy S5 for both the Verizon and China Telecom models. In addition, it was recently announced their highly touted WiFi FEIC is designed into the Samsung Galaxy Tab Pro and the smartphone Huawei Ascend P7. Furthermore, Anadigics has been delivering on its strategy to accelerate product design wins in the red hot Chinese smartphone market, which is expected to grow more than 30% in 2014 alone. They recently announced several PA design wins for 3G/4G smart phones at Huawei, ZTE, Coolpad and Innos. The new AWL5910 PA, optimized for WiFi infrastructure and multimedia applications, including access points, routers, media gateways, set-top boxes, and smart TVs, was released just a couple weeks ago and has already been designed in several flagship products. This recent flood of design wins will undoubtedly result in a significant uptick of revenue in the coming quarters.

In highly cyclical industries such as semiconductors, many investors use price-to-sales (P/S) ratio to evaluate if a company is fairly valued. P/S ratio illustrates the value Wall Street places on every dollar of the company's sales and a good metric to determine if the company is undervalued compared to others in the field. A low P/S typically illustrates a good value for investors, while a high P/S can be a warning that the stock is overvalued. Anadigics currently has an extremely low P/S ratio of .67 compared to competitors like RFMD (2.35), Triquint (TQNT) (3.01) and SWKS (4.32). Therefore, turning profitable by year's end should significantly increase the value of Anadigics as a quadrupling in stock price from current values would result in a similar P/S valuation as others in the sector. There is a lot of room for the stock to run.

With increasing revenue and product margins, cash burn rate should continue to decline. Currently, Anadigics has $14 million in cash and has secured an $11 million line of revolving credit with PNC bank. The confidence that EBITDA will pick up in the coming quarters is illustrated by the covenant described in the credit agreement with PNC:

"(A) Minimum EBITDA Covenant. Cause to be maintained as of the end of each fiscal quarter, an EBITDA of not less than (I) negative (-) $26,500,000 for the fiscal quarter ending March 31, 2014, (ii) negative (-) $24,000,000 for the fiscal quarter ending June 30, 2014, (III) negative (-) $20,600,000 for the fiscal quarter ending September 30, 2014, (iv) negative (-) $12,000,000 for the fiscal quarter ending December 31, 2014, (V) negative (-) $3,500,000 for the fiscal quarter ending March 31, 2015 and (vi) $4,000,000 for the fiscal quarter ending June 30, 2015 and each fiscal quarter thereafter, tested on a trailing twelve (12) month basis at all times."

Therefore, Anadigics expects a difference in EBITDA of $14,500 between the end of Q1 2014 and Q4 2014, which would mean EBITDA profitability in 2014.

With the significant design wins recently announced there is little doubt profitability is on the horizon. The current weakness in the stock price allows investors to pick up shares at a significant discount to its peers with little risk. I continue to add to my position at these levels.

Disclosure: I am long ANAD, SWKS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Source: Anadigics Is Significantly Undervalued As Product Design Wins Pile Up