On Wednesday, October 3, analysts at Lazard Capital upgraded shares of Semtech Corp. (NASDAQ:SMTC). The firm raised its rating on the stock from a Neutral to a Buy and set a $31.00/share price target. As a result of the upgrade, shares of SMTC reacted quite nicely trading up as much as 2.11%. That said I wanted to examine the company a bit further and take a look at how it compares to some of its industry-based peers in terms of several fundamental categories. The two companies within the semiconductor sector I chose to compare with Semtech are Analog Devices (NYSE:ADI) and Texas Instruments Inc. (NYSE:TXN).
Overview: Semtech Corp.
"Semtech Corporation, together with its subsidiaries, designs, produces, and markets analog and mixed-signal semiconductor products. The company's product lines include protection products comprising filter and termination devices that provide protection for electronic systems from voltage spikes; power management products consisting of switching voltage regulators, combination switching and linear regulators, smart regulators, and charge pumps; and discrete semiconductor products, such as rectifiers, assemblies, and other products. Semtech Corporation was founded in 1960 and is headquartered in Camarillo, California."(Profile: Yahoo Finance).
As a whole, I've found that the semiconductor sector has one of the widest ranges of profit margins when compared to some of the other industries I've written articles on. That said the average profit margin of the three companies featured is a pretty moderate 15.52%. In the last 12 months Semtech Corp. has managed to demonstrate a profit margin of 10.42%, whereas direct competitors Texas Instruments and Analog Devices have demonstrated profit margins of 12.06% and 24.08%, respectively. If we examine those numbers a bit closer we'll notice that Semtech Corp. is outpaced by both Texas Instruments (by a ratio of 1.15 to 1) and Analog Devices (by a ratio of 2.31 to 1) and will need to find ways to improve on those margins if the company wants to compete with the likes of both ADI and TXN.
When we examine margins as a whole we need to do it in two parts, and with that said I wanted to comparatively examine the operating margins of the three companies featured in this article. That said the average operating margin of the three companies featured is a pretty admirable 22.82%. In the last 12 months Semtech Corp. has managed to demonstrate an operating margin of 14.59%, whereas direct competitors Texas Instruments and Analog Devices have demonstrated stronger profit margins of 22.47% and 31.40%, respectively. If we examine those numbers a bit closer we'll notice that once again Texas Instruments and Analog Devices both outpace Semtech by ratios of 1.54 to 1 and 2.15 to 1, respectively.
Would I consider a position in Semtech based on the company's recent margin comparisons, in the wake of Lazard Capital's upgrade? Although the company's profit and operating margins are somewhat solid, Semtech doesn't to outpace either of its competitors in this category, which makes me a bit cautious from this perspective. As the result of such a placing in terms of comparatives, I'd want to examine a second category of fundamentals before making an investment decision.
Returns on Assets and Equities Over the Last 12 Months
In the wake of a very poor showing on the part of Semtech, in terms of both profit and operating margins, there is one final comparison to examine, and that is the return on both assets and equities each of these companies have demonstrated over the last 12 months. The average return on assets by all three companies featured is a pretty mediocre 8.32%. Semtech Corp. managed to demonstrate a return on assets of just 4.76%, whereas Analog Devices managed to demonstrate a return on assets of 9.98% (which outpaced SMTC by a ratio of 2.09 to 1) and Texas Instruments managed to demonstrate a return on assets of 10.23% (which managed to outpace SMTC by a ratio of 2.14 to 1).
The average return on equity by all three companies featured is a pretty mediocre 13.20%. Semtech Corp. managed to demonstrate a return on assets of just 8.09%, whereas Analog Devices managed to demonstrate a return on assets of 16.93% (which outpaced SMTC by a ratio of 2.09 to 1) and Texas Instruments managed to demonstrate a return on assets of 14.59% (which managed to outpace SMTC by a ratio of 1.80 to 1).
Do SMTC's returns on both assets and equity strengthen the case for potential investors to establish a position? I really don't think they do, and if anything those numbers actually make me more cautious than I was before. If we consider the fact Semtech has managed to demonstrate poor returns on top of even poorer margins over the last 12 months, we'll notice there really isn't much the company can do to substantially improve those numbers.
Are there any positive catalysts ahead for potential investors of Semtech? There are a few factors to keep in mind before establishing a position in SMTC. The most important thing potential investors need to understand is the basis behind Lazard Capital's upgrade that was announced earlier today. According to an article on The Street.com "the Gennum deal has attractive synergies and the company is growing in emerging markets," which could equate to, in my opinion, a possible improvement in margins and returns over the next 12-24 months.
Should potential investors consider a position in Semtech based on the two fundamental comparisons I've presented in the wake of Lazard Capital's upgrade? No. Based the comparative analysis I've presented, which demonstrates the fact that SMTC's margins and returns need room for improvement, I'd remain very cautious on the company and stay in a very conservative holding pattern before reacting to the upgrade by Lazard. In my opinion, I'd want to see how the Gennum deal plays out and to what extent it contributes to the company's margins and returns over the next 12-24 months.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.