Whenever I see the share price of a company on my watch-list trading near its 52-week lows, I tend to want to take a deeper look into the long term story. A company that caught my eye was Lattice Semiconductor Corporation (LSCC), a fabless designer of FPGA, CPLD, and SPLD semiconductor solutions.
These products see a wide variety of uses such as voltage monitoring in solid state drives, clock generation and memory bus interfaces in servers, image rotation in digital cameras, and a whole host of other applications.
The main problems that seem to have brought Lattice to near 52-week lows are:
- On June 14th, the company pre-announced that they would miss their previous revenue guidance of flat to +4% Q/Q and instead come in at -4% to flat Q/Q. Gross margins were also guided down from 55% to 51%. The miss on the margin side was particularly worrisome, especially as margins in the year ago quarter were slightly greater than 60%.
- When the company reported earnings on July 19th, they came in-line with revenue expectations and missed EPS estimates by $0.02.
- Guidance given was not particularly strong, coming in at flat +/- 2% on revenues, 52% gross margins +/- 2%, and operating expenses of roughly $38M. At the very high end of the gross margin and revenue guidance, and assuming OpEx given is accurate, the company can eke out profitability in the current quarter, but in all likelihood the company will post a small loss in the current quarter.
Despite this negative short term outlook, I am bullish on the stock in the medium to long term for the following reasons:
- Cash Position Is Strong: The company has $184.48M in cash and no long term debt, which represents a net cash position of roughly 41% the firm's market capitalization. This strong position means that even during temporary periods of revenue slumps, margin contraction, and slight operating losses, the company won't have to issue equity or go into debt. For a more risky speculative play, this is particularly comforting.
- Valuation Is Attractive: A few of Lattice's major competitors are Altera (ALTR) and Xilinx (XLNX). The former trades at 19.35x trailing earnings, 6.31x sales, and 3.63x book. The latter trades at 18.07x trailing earnings, 3.96x sales, and 3.22x book value. Lattice, on the other hand, trades at 13.3x trailing earnings, 1.45x sales, and 1.15x book. Now, Lattice's two larger competitors offer value in the form of dividends, stronger profitability than Lattice, but in terms of price appreciation, I believe Lattice has the strongest upside potential.
- Weakness Is Macroeconomic: The weakness that Lattice exhibits seems to be macro-economic based and not due to any real company specific problems. Competitors Xilinx and Altera both also reported quarterly earnings that were marked decreases on a year-over-year basis, making the company's macro-economic arguments viable.
- New Products Doing Well: The company segments its products into three categories: new, mainstream, mature that represent 20%, 60%, and 20% of the product mix respectively. The "new" segment saw a 21% Q/Q increase, the "mainstream" segment came in at an 11% Q/Q increase, but the "mature" segment saw a 35% Q/Q decrease. It is encouraging to see that the newer developments are seeing strength, which supports a long term growth story for the company.
In short, on a valuation basis, Lattice seems attractive, and the large cash position is particularly appealing as it helps prop book value up to $3.17/share to give investors a solid margin of safety at the sub-$4 levels. Further, as I believe the issues the company faces are macro-related and not due to any significant missteps in execution, Lattice Semiconductor is a buy for the contrarian investor who doesn't mind a little volatility and has enough patience to wait for the semiconductor sector in general to rebound.
Since the stock is highly volatile (beta of 1.75), I recommend scaling into the position in small lots to make sure you get in at a reasonable cost basis.
Disclosure: I am long LSCC.