Growth Is Still Expected in Wireless Infrastructure

Our Zacks senior analyst covering the semiconductor portion of the tech industry, Abdul Saleh, has always been helpful with allowing investors to see how certain aspects of the industry are expected (or not expected) to improve over the near- to medium-term. Here’s what he had for us most recently.

You cover the semiconductor industry within the overall tech sector. How are things progressing in this space these days?

As you might imagine, this is a very diverse field of companies and stocks, so I would do well to focus on a few recent reports I have completed. To give you an idea of how I rate the tech space overall, I am selecting a Buy, a Sell and a Hold.

Fair enough. Let’s start with the Buy recommendation, first.

My most recent Buy report was issued on Altera Corp. (ALTR). We believe Altera is a play on the secular trend of PLDs [programmable logic devices] replacing ASICs [application-specific integrated circuits].

The hallmark of a PLD is its flexibility. When designs have to be altered, they can be re-programmed and brought to market faster. Changes can be made even when the devices are in the field. However, the unit cost of each PLD is more than the unit cost of an additional ASIC.

In the long run, PLDs are expected to replace ASICs, providing a strong opportunity for Altera’s future growth. FPGAs [Field-Programmable Gate Arrays] now comprise approximately 71% of total PLD sales, and it is generally believed that the FPGA sub-segment will continue to be the fastest growing of the PLD market.

Is Altera the main company producing these products?

Altera’s main rival is Xilinx (XLNX). Together they hold nearly 80% of the PLD market. However, the company has a strategic advantage over Xilinx regarding its HardCopy offering (a new type of high performance application-specific integrated circuit for which Xilinx does not really have a competing product).

The primary theme to watch at Altera over the next 12 months is new product introductions and technology migrations. During the 65nm transition cycle for the semiconductor industry, Altera trailed Xilinx significantly in terms of timing. Altera is only beginning to ramp up 65nm products at the moment.

Altera also will begin rolling out this year its first 45nm products. This is not only ahead of Xilinx, but uniquely is also at par with at least one of the two major PC central processing unit [CPU] vendors in the IC [integrated chip] industry.

Very interesting. Can we turn to your recent Sell for a moment?

Phoenix-based Avnet (AVT) operates in two business segments: Electronics Marketing and Technology Solutions. The company is being adversely affected by the price war between Intel (INTC) and AMD (AMD); it is expanding its relationship with AMD even as its Intel business shrinks.

The company has over $1.3 billion in long-term debt and liabilities (33% debt-to-total capital), which is substantially high. Avnet had approximately $1.23 billion of long-term debt and liabilities at the end of Q3, down from approximately $1.28 billion at the end of the prior quarter. While the Access acquisition will raise revenue and EPS, the valuation appears rich, in our opinion.

The core business looks weak, and all the growth seems to be coming from acquisitions. Management’s expectations of $160 million in yearly synergies from the Memec acquisition could prove to be aggressive.

Avnet has over $1 billion in long-term debt. The equity multiplier has been bumpy over the last 11 quarters, as equity had been increasing faster than the increase in total assets. This is a metric to watch, given the company’s already large total debt position. Our current target price is $28 (9.0x FY2008 earnings estimate), to reflect the margin issues and sluggish demand trends across the company’s computing business

Which of the several Hold-rated stocks on your coverage would you like to talk about?

Let’s take a look at Anadigics (ANAD), which designs and manufactures radio frequency integrated circuits (ICs) for the wireless and broadband markets. In the wireless market, the company focuses on handsets and infrastructure equipment. In the broadband market, the company sells to the cable set-top box and infrastructure market.

At an operational level, ANAD performed very well during the March quarter and the company is expected to complete most of its fab[rication plant] expansion soon. ANAD indicated that with the performance tweaks included, it expects the New Jersey fab to be able to produce around $100 million in revenue capacity.

In addition the company expects its China fab to come on line in the second half of 2009. Going forward, one significant development is expected to be the return of the cable infrastructure business.

However, given the recent run-up, we think the stock is close to being fairly valued. At a P/S [price-to-sales] multiple of roughly 2.4x our FY2008 revenue estimate, we have set a target price of $12.00.

Abdul Saleh is a senior analyst covering the semiconductor market for Zacks Equity Research.