Sigma "Massacre" - What To Do?

Today was another nightmare for the Sigma (SIGM) bulls (myself included). But amidst the fear, you must realize the fundamentals:

• After the 5M share buyback, 25,031,060 shares are outstanding. (3.8M are confirmed completed at $21/share. The remaining 1.2M shares may have been already bought, or will likely be bought at these much lower prices).
• Assuming all 5M shares are bought at $21, total net assets minus liabilities is at $240.5M. $9.60 per share liquidation value. Only $26M of those assets are inventories. This is not a substantial inventory risk.
• At $15.50-$16.00 per share, the FY09 outlook is still similar, with the Baird lowball of $2.40 earnings. Even if this company stumbles over itself, two to four years of $1.50-$2.00 earnings targets (cumulative $6.00) augments cash to derive a liquidation value equal to the stock's current price. Considering many targets are at $2.40-$2.80/share for the upcoming year, this is not overly optimistic and provides a cushion going forward.

Perspective

For perspective, the last time the stock traded in this price territory of the mid-teens, in early 2006, Assets - Liabilities were at $43M, with only a slightly smaller 21.95M share float (versus $240.5M and a 25M share float now). Year end revenues for the annual period leading up to early '06 were 33M, while this year we are guiding easily ten times that level.

Substantiation?

Obviously, there is risk as this company is leveraged highly to the IPTV business, and is exposed to new competition from Broadcom. Interestingly, the Baird downgrade's basis (paraphrased: after "Robert W. Baird analyst Tristan Gerra asserted in a research note that Broadcom (BRCM) “has won” Motorola’s (MOT) second-generation IPTV set-top box for Microsoft’s (MSFT) Mediaroom platform.") has not been confirmed by Broadcom nor Motorola as of this writing. Furthermore, the new SMP8654 product announced the previous day shows Sigma is on the ball providing an integrated next generation IPTV cost-viable system on a chip product going forward. Despite Motorola being 23% of Sigma's business, is it likely they switched their entire product line going forward from one supplier to another all at once (for FY10)? Again, this is questionably weak assumption to follow, since Sigma has a mature product already in cycle. Sell first, question later?

Bottom Line

At these prices, your downside risk, facilitated by the value floor cash value provides, is likely $2-3/share (assuming continued fear liquidation continues), and my previous targets (found here) remain in the same ballpark at $40-$74, factoring in the weakened future revenues from competition that should be offset by reduction of share float.

I picked up some May 17.5 calls at 1.25 (to add to my existing position), looking for a retest of at least 20 in the very near term.

Disclosure: Author is long SIGM.

Comments

[User 202507:]

MICHAEL, WHAT DO YOU MAKE OF THE OFT-ANNIHILATION OF SHARES OF SIGMA AGAIN TODAY? THANKS

2008 May 30 03:02 PM

[Michael B. ...:]

Have a new entry posted. Go to scriabinop23.blogspot..... Coming to seekingalpha in a few days.

2008 May 30 10:37 PM