High Tide for SiRF Technology

SiRF Technology, a manufacturer of semiconductors for GPS devices, reported revenue $600,000 less than expected -- and the market took the stock out to the woodshed and shot it. And shot it again and again.

SIRF reported earnings of 28 cents a share on revenues of $100.4 million versus the consensus estimate of 32 cents a share on revenues of $101 million (see conference call transcript).

In other words, the company reported an EPS 13% less than expected, and the market capitalization was reduced by almost 60%. Seems a little over zealous to me.

With SIRF closing at $6.67 on Friday, it seems the selling was a bit overdone when you consider that the company has $2.30 a share in cash and cash equivalents. (as per the filing of the december quarter showing $139.4 million cash and cash equivalents and 60.7 million shares out). AND no debt.

Sure, there are the concerns (real and imagined) that the economy is weakening, the company may experience a decline in market share, there could be pricing pressures, competition and the company's stated cautionary outlook in the near term. But, even with the new estimates of 55 cents a share in earnings for 2008 and 77 cents a share for 2009, SIRF looks severely undervalued.

The updated revenue expectations for 2008 of $378.5 million and for 2009 of $440.2 million still does not justify the free fall in price. The updated estimated revenue growth for SIRF is now 16% (2009 over 2008) and earnings growth is 40% (2009 vs. 2008). SIRF trades at less than 9 times estimated 2008 earnings of 55 cents a share (after adjusting for the $2.30 a share in net cash) and at 6.5 times estimated earnings of 77 cents a share for 2009.

Using a Price (minus net cash) to Sales Ratio, SIRF is now valued at 0.81 times estimated 2008 revenue of $378.5 million for 2008 and at 0.70 times estimated revenues of $440.2 million for 2009.

With projected earnings growth of 40%, a Price to Sales Ratio of 1.5-2.0 could be supported easily--translating into a price of $5.00-$7.00.

Now you just have to wait until the disappointed investors exit and the new opportunists start to put their capital to work. GPS devices are a growth industry and SIRF is a major supplier for the necessar semiconductors. SIRF is a BUY--but average in over the next week or so.

Disclosure: Author has a long position in SIRF

Comments

[AlanBrochstein]

SIRF didn't close at 2.62, it closed at 6.67. It is trading above its book equity, which is mainly intangibles (related primarily to Centrality acquisition). The balance sheet shows an alarming increase in receivables and inventory relative to sales. This is a red flag and could signal write-downs or continued deterioration in gross margins. The company is unlikely to earn the .48 that analysts now project if that is the case. In the end, this company may end up looking like a wad of low-returning cash. How many former high-flying tech companies have we seen that just muddle along with their cash for years and years. In this case, the stock may ultimately be worth only a slight premium to cash. It is too early to conclude that the margin pressures and sudden drop in projected revenues are a one-time event or the beginning of a death-march. I would be very careful owning this one, though the reward could be great if it proves to be a temporary event. I would wait for a couple of things. First, I would want to see the stock make it through the IPO price - there will be some pressure at that level on the way back up. More importantly, I would want to see inventories get more in line with sales. I know chips don't spoil, but they do become outdated in terms of technology. Good luck...

[TheTruth]

Alan, you are clueless...The net of receivables/ar actually declined $3M between Q3 & Q4....And this statement is a classic "First, I would want to see the stock make it through the IPO price"....That is $15 Alan...So I should miss out on $9 of upside BEFORE I buy...Catch a clue

[AlanBrochstein]

Clueless? While you are correct that AR fell, it is still up 102% year-over-year. Inventories, which are more concerning, increased in a quarter that represents the seasonal peak and are up 70% year-over-year. It is no wonder that the consensus forecast for next quarter is a small loss and a large year-over-year decline in EPS despite higher expected sales.

As far as my "classic statement", I don't think that you will be missing out on that first $8.33, because it isn't happening most likely. A long-term investor should stay away until it breaks the IPO price. Maybe this it too conservative, but certainly one should wait until the old lows of $10 are cleared. If this was December, I might want to be more aggressive (if it was tax-loss motivated), there are way too many fish in the sea than to tie up capital here.

By the way, there are nicer ways to make your point than calling someone clueless. This isn't a Yahoo message board!

[tessant]

your right- this is a site where anyone can write an article and it get posted on yahoo...unreal...altho... i like sirf at these levels, i dont understand how anyone can get an article posted on SA that can move a stock...

[tessant]

i think SIRF can be bought out here at these levels...however, the whole tech sector is hurting in general

[AlanBrochstein]

The future of SIRF is likely similar to that of ESST, which did (finally) get a buyout bid at about cash value. These companies are very similar - they sell a specialized chip that is subject to intense competition.

[TheTruth]

Comparing Y-t-Y is not a fair analysis given the Centrality acquisition (you fail to highlight that sales also increased 33% Y-t-Y). You are comparing apples & oranges. A more accurate analysis would include comparing 3Q to 4Q.

Also, the net of inventory and a/r was higher in 3Q yet the stock was in the high $20's even with this news public. Now its 3M lower and the stock is $6. Conclusion, inventory & a/r levels are NOT the of major concern. My guess would be the lack of forward visability.

In regards to waiting for $10, I believe this is a much more reasonable conclusion. However, SIRF meeting the fate of ESST is just false.

[AlanBrochstein]

I agree that the Centrality acquisition muddles the analysis, but their sales increase PALES in comparison to the balance sheet items. The inventory, again, is the one that disturbs me the most.

On your second point, inventory and AR don't matter until they do matter, if you know what I mean. Sadly, very few analysts give proper consideration to the balance sheet. In the case of SIRF, it would be easy not to pay attention - lots of cash, no debt, and positive free cash flow. If you take a look at TIE on Seeking Alpha, you will find an article I wrote last year on that company's alarming balance sheet trends. The next earnings report, the proverbial sheet hit the fan. I don't always get it right, but I am confident that there is a potential inventory situation brewing here.

Technology companies come and go all the time. Look at Iomega - they were hot - a 100-bagger from 1994-1996. They have been in a long, painful decline since then. GPS technology isn't going away, but maybe BRCM knocks the crap out of SIRF. Maybe the competition is from elsewhere. All I can say is that there are many, many examples in the sector of high-flyers that get grounded. At my last job, I recommended a stock that was Wi-fi related and had the support of INTC. What a crappy pick that turned out to be - their technology was bypassed and the company withered away. Don't be so cocky about SIRF. I used to think that it wasn't like ESST or other specialized semi makers, but I see now that it apparently is.

Are you long the stock from higher levels? Sounds like it. I have no position and am sharing what I believe is an unbiased opinion. I could be wrong, but if it breaks 10 THEN I would reconsider my views.

[jimmy46]

What no one mentions but is paramount, is how many customers do they have?
Garmin cut orders and that has a lot to do with the stock tanking.
Do they have any other customers?
Note that the insiders were selling big time before the crash.

[cdpayne]

Recommending that speculators wait until sh/pr rises to IPO level?? Sorry, but that is absolutely absurd advice. SIRF went in with a fairly heavy short interest, and that has likely increased significantly considering volume on the downside and the recent pattern of hedgie shorting since the 'uptick' rule elimination. If the market continues heading South in the coming week, the less adventuresome (non-traders) might wish to wait and see if $6.50sh holds, but anyone wanting the comfort of IPO prices should put his money in a mutual fund.

[AlanBrochstein]

I don't believe that I recommended that SPECULATORS wait for the IPO price, as that wouldn't make sense. My comments were addressed to long-term investors - perhaps I wasn't clear. Also, I admitted in a later comment that perhaps I was being overly conservative - $10 is the ceiling that needs to lift. For short-term traders, I guess I wouldn't be surprised if SIRF were to recover a small portion of its overall losses. I certainly wouldn't consider betting on a further decline imminently - the stock is very oversold. I would rather, however, buy falling knives for a trade that have better fundamentals than this one. I believe that as more institutional holders evaluate the balance sheet they will choose to exit as well.

[David Greene]

The investment thesis for SIRF in the near term is that the selling has swung too harshly to the downside as the "herd' has moved out of the stock. However, new investors/traders will take positions as the stock begins to turn. The fundamentals, in my opinion, make SIRF a low risk investment right now. But I am not investing for two years--I look to invest for short term to one year. I am content with 30-50% returns --and the sooner the better.

SIRF has a rather substantial short interest of 15,984,072 as of 1/31/2008. Once the selling abates and the short sellers begin to see their profits start to wither, short covering will begin in earnest.

[sirfer]

Do you think that the class action law suit has been totally factorer in the current price? Thanks for any input.

[TheTruth]

Alan, anymore 'double talk' for us????

[sirfman]

still there is a mistake -
"With projected earnings growth of 40%, a Price to Sales Ratio of 1.5-2.0 could be supported easily--translating into a price of $5.00-$7.00."

it should translate into a price of $10-$12

[Plantinseeds]

Garmin is not Sirfs only customer but it is its largest for the GPS IC chip sets. Sirf does command 80% of this market. Broadcom ( Garmin has its own chipsets as well but not near the quailty compared to Sirfs) is chipping away at this market but hey let em take another 10% market share....Sirf still has alot of growth with 70% market share.

Oh and yes I'm long on Sirf.

In His Grace

[wobatus]

Well, another shoe dropped today. Looks like Alan was right about the risks.

[surferdude]

Hi I'm David. My recommendation is that you buy Sirf. The stock has cash of $2...plus if you add yours in the mix it will have more cash. The multiples exceed everyones expectations and we should see valuation in the mid $12 range. If you factor in the number of hairs the president has in his nose it could even go higher! Sirf sure is a swell stock and it rhymes with Surf. Hey dude surfs up man. Any stock that has surf in it is a sure bet and someday we can smoke some weed under the setting sun and reflect on this swell purchase.

[AlanBrochstein]

The Truth -

How is it going? I typically don't "gloat", but your comments were particularly rude. Hey, I mentioned IOM, and they FINALLY got acquired. This is the future of SIRF. It will be acquired by someone who will buy there technology and fire all of their workers and strip out the cash on the balance sheet.

As far as this 2nd miserable quarter, the inventory ROSE again - $2.5mm sequentially and $11.5mm from a year ago despite sales being down $38mm from a year ago and $5mm sequentially (including the acquisition!). Guidance, not surprisingly is somewhat short of diminished expectations. If they hit the high-end of $64mm, it will represent a decline of $6mm. No wonder margins will be flat to lower. THEY HAVE TOO MUCH INVENTORY. On a bright note, they did get the receivables in line.

For those who are attracted to this stock, invest looking ahead and not in the rear-view mirror. The stock is broken because the company is broken. The cash will dwindle as the losses accumulate. While "cash" appears to have increased, keep in mind that AR came down a lot. So did "marketable securities". The proof of the situation is at the end of the balance sheet - Equity came down $20mm or 4% in just 1 quarter.

Companies in retrenchment run into trouble - their customers get worried, their employee morale plummets. Do yourself a favor and tread VERY cautiously here. Disclosure: No position in the stock or any semiconductor company at this time

[Rainheavy2002]

If you are not long or short this stock, why the hell you posted so many negative comments on this company? Shorts always post negative comments on a stock while claiming no postion.


On Apr 24 07:37 PM Alan Brochstein wrote:

> The Truth -
>
> How is it going? I typically don't "gloat", but your comments were
> particularly rude. Hey, I mentioned IOM, and they FINALLY got acquired.
> This is the future of SIRF. It will be acquired by someone who will
> buy there technology and fire all of their workers and strip out
> the cash on the balance sheet.
>
> As far as this 2nd miserable quarter, the inventory ROSE again -
> $2.5mm sequentially and $11.5mm from a year ago despite sales being
> down $38mm from a year ago and $5mm sequentially (including the acquisition!).
> Guidance, not surprisingly is somewhat short of diminished expectations.
> If they hit the high-end of $64mm, it will represent a decline of
> $6mm. No wonder margins will be flat to lower. THEY HAVE TOO MUCH
> INVENTORY. On a bright note, they did get the receivables in line.
>
>
> For those who are attracted to this stock, invest looking ahead and
> not in the rear-view mirror. The stock is broken because the company
> is broken. The cash will dwindle as the losses accumulate. While
> "cash" appears to have increased, keep in mind that AR came down
> a lot. So did "marketable securities". The proof of the situation
> is at the end of the balance sheet - Equity came down $20mm or 4%
> in just 1 quarter.
>
> Companies in retrenchment run into trouble - their customers get
> worried, their employee morale plummets. Do yourself a favor and
> tread VERY cautiously here. Disclosure: No position in the stock
> or any semiconductor company at this time