Earnings Preview: Silicon Laboratories

Elizabeth Pate of FBR Research wrote a note to clients on Silicon Laboratories (SLAB) in her latest overview of the semiconductor components sector. Excerpts follow:

Silicon Laboratories: Market Perform, $37 Price target

4Q earnings preview:
We currently forecast 4Q07 revenues and EPS of $96 million and $0.40, respectively... Recent channel checks from Asia suggest that business is strong... Reasons for Silicon Labs' strengthening business trends include (1) very strong FM Tuner shipments, (2) a return to more robust purchasing patterns at its networking customers after a somewhat weak summer, and (3) a strong PC supply chain driving some strength for Microcontrollers or legacy DAA chips.

1Q guidance expectations:
We currently forecast 1Q08 revenues and EPS of $89.7 and $0.33, respectively, versus consensus estimates of $90 million and $0.34. We think that the firm could guide 1Q revenues to a range of $88 million to $92 million, in line with the Street... We believe FM Tuner shipments remain robust in the near term.

Silicon Laboratories investment thesis:
We think Silicon Labs is a solid chip firm with good products and technology, but we are neutral on the stock, given the following: (1) we believe current valuation metrics largely reflect the company's key growth opportunities, (2) we have some concerns that the firm's revenue growth in 2008 could slow before other products pick up the slack in 2009, and (3) we still have some chip industry-related supply/inventory concerns with respect to 1H08.

Silicon Laboratories valuation methodology:
SLAB's valuation metrics are not cheap but appropriate, given its opportunities, in our view. SLAB trades at forward P/E multiples of 23x (2008) and 20x (2009), close to an appropriate forward P/E multiple of 22x to 24x. On an EV/sales basis, SLAB trades at 3.9x (2008), the highest in our universe, reflecting the firm's high margins and growth prospects. We base our $38 price target on a 22x multiple of our forward EPS estimate (2H08 and 1H09).