My favorite kinds of small-cap growth companies are those that are able to grow revenues at high double-digit percentage rates, maintain and grow profitability in tandem with sales, maintain a strong balance sheet, and see growth come from both secular industry trends and company-specific strength. One such company is Silicon Motion Technology Corporation (SIMO).
The company is a fabless semiconductor company that focuses on mobile semiconductor solutions. In particular, the company exhibits significant strength in the mobile storage area by developing controllers for flash cards, USB drives, solid state drives, and embedded flash solutions. Further, the company develops embedded GPUs for hand-held devices, medical equipment, casino gaming machines, and other uses. And finally, the company provides mobile communication solutions.
Silicon Motion appears to be a "buy" for the following reasons:
1. Impressive Growth: In the most recent quarter, the company posted record sales, expanding by 38% on a year-over-year basis, while keeping gross margins mostly intact, seeing only a slight decrease from 49.5% to 49.1%. Earnings per share grew from $0.29 to $0.42, representing a 44.8% increase year-over-year. Revenues for the current quarter are guided to be up 5%-8% from the most recently reported one, which would imply revenues of $73.1M-$75.2M, or an 18% year-over-year increase from the midpoint of the guidance.
2. Solid Balance Sheet: Silicon Motion has a strong balance sheet with $113M in cash and no long-term debt. This cash position represents 21% of the company's market capitalization, and allows the company to weather any short-term headwinds without the need to go into debt or raise capital through an equity offering.
3. Significant Mobile Communications Design Wins: In its most recent earnings release, the company noted that Samsung (the largest smartphone vendor by market share) is using its LTE transceiver in Galaxy S III phones shipping to all three Korean wireless carriers. Further, the company disclosed a design win in an upcoming Samsung phone targeting "major US wireless carriers" in the first half of 2013. LTE sales increased 23% sequentially for the company in the most recent quarter. Mobile devices are only becoming more prevalent going forward, and scoring design wins with the largest providers of such products is a healthy sign.
4. Mobile Storage Performing Well: Silicon Motion is currently supplying eMMC flash controllers to both Samsung and Hynix, and noted that sales to one of its partners "ramped sharply" and sales to the other have begun. eMMC, a flash memory solution that embeds flash, controller, and MultiMediaCard interface onto a single die, is significant because it's much easier to integrate into systems using the desired device. Notable products that use eMMC solutions include smartphones and tablets. In the most recent quarter, mobile storage revenues grew 49% year-over-year.
5. Valuation Is Attractive: The company trades at 13.03x earnings (which is below the industry median of 15.87) and a PEG ratio of 0.63 - which is also quite low. Further, backing out the net cash position, gives us a price to earnings of merely 10.3. For double-digit revenue and earnings growth, strong gross margins, and compelling technology, this company's valuation is attractive.
6. Sentiment Is Strong: The median one-year target from the five analysts that cover the company is $28 with the low target at $23 and the high at $35, so the analysts are on-board. In addition, only about 2M shares or roughly 6% of the float is sold short, further bolstering the general positive sentiment surrounding the stock.
With a strong cash position, high growth in a number of segments, and a good number of design wins with high profile clients, I am comfortable recommending this stock on a pullback.