Exar Corp. (NYSE:EXAR), a 40-year-old semiconductor company, is beginning to see positive results from their recent turnaround efforts. They just turned profitable, and analysts expect earnings to double within the next 18 months. Fortunately for us, the share price has not yet reflected these positive developments.
I have been trading this stock throughout 2011, always profitably. I generally net between 5% and 15% per trade, usually holding for a couple of weeks. Nothing spectacular, but extremely reliable. Last Friday when the share price dropped well below six dollars, I began a new long position.
There are 10 reasons I believe this company is a good buy at this level:
Number 1: They are sitting on $4.50 per share in cash and no debt. They also own buildings and land which takes their asset value well above $4.50. Even during the 2008 crash, the stock never got below $5 a share, primarily due to their strong balance sheet. This cash position gives us a floor, and we can pretty much count on the share price not dropping below $5, no matter what happens in the global economy.
Number 2: Last quarter Exar generated $2 million in cash from operations which was added to their balance sheet. Unlike many companies with a strong cash position, Exar is growing their balance sheet, not shrinking it. They do not plan any acquisitions for the next year or two.
Number 3: 60% of their business is in Asia, and with Asia's robust GDP we can count on Exar's top line growth.
Number 4: They sell to most of the tier 1 companies in the world including Cisco (NASDAQ:CSCO), EMC (NYSE:EMC), HP (NYSE:HPQ), Alcatel (NYSE:ALU), etc. Their products include datacom and storage, interface, power, and communications. Their cloud computing products are experiencing tremendous growth.
Number 5: Their new CEO, Pete Rodriguez, has proven himself over the last three years. Exar's successful turnaround is due in large part to his excellent leadership.
Number 6: From fiscal year 2007 to fiscal year 2011, their compound annual growth rate was 20%.
Number 7: Given their history of cash preservation, new product development, and their recent turn to profitability, I consider their share price to be undervalued.
Number 8: There has been a lot of insider buying at over $6 per share, primarily from George Soros's group. With 14% of the company, I am confident Soros has all the important information that is available, and he is predicting a bright future for the company.
Number 9: There is a lot of smart money behind this company, including Renaissance Technologies, Wells Fargo, Blackrock, Royce and Associates, and of course George Soros. These guys did not sell during the recession. Yes, I believe they got in too early, but the fact that they stayed invested speaks to their confidence in this company.
Number 10: Exar is ripe for a takeover. This could easily happen within the next year, and I would expect a 30% to 50% premium over today's share price. For this reason, I will continue trading, around a core position.
I can't stress enough how undervalued this company is. Analysts are predicting EPS of $.15 this year, and $.35 next year. If we take Friday's closing share price of $5.73 and back out the cash and other hard assets, we end up with a share price of about $1. That gives us a PE of 6.6 for this year and 2.8 for next year. For a growing company, with relevant products, that's too cheap.
Disclosure: I am long EXAR.