Value Bulldog's  Instablog

Near the end of 2002, disk drive industry leader Seagate went public (again) following its very successful buyout by Silver Lake Partners and Texas Pacific Group. In its fiscal year ending June 2002 Seagate had about $6.1B of revenue and $374M of operating income. The offering priced at $12.00, and at its highs more than doubled over the next year.

Fast forward to 2010. Over the last eight years, Seagate has grown revenue to $11.4B in the fiscal year ending June 2010, a CAGR of about 8%- a respectable but not spectacular number. During this time operating margins expanded through the industry's boom and bust cycles such that Seagate reported $1.9B in operating income in fiscal 2010 for a 17% operating margin, up considerably from 2002's 6%.

So, after 8 years in which the company nearly doubled revenue and quintupled operating income, how did investors do? Today the stock sits at around $12.80 for a measly total return of 7%. True, operating margins are headed down in fiscal 2011, but even the most bearish estimates don't have the company at a much below 10% operating income. As far as I can tell all the Internet content being created still has to be stored somewhere.

Seagate is an amazing example of the multiple compression that has taken place in large cap tech over the last few years. This can also be seen in MSFT and peer WDC as well as even GOOG and AAPL. With Seagate and Western Digital trading at mid to low single digit P/E multiples, one has to wonder if Silver Lake and/or TPG are thinking of taking another bite at the apple.


Disclosure: Long STX

The first one is one you probably noticed- Intel. Intel indicated very healthy PC end markets with seasonal growth in the 2H of the year to complement the above-seasonal growth in 1H. The low end of their Q3 guidance was above consensus and it should be noted they have absolutely smashed their own Q1 and Q2 guidance.

The second one was probably not noticed as much. Fairchild Semiconductor, one of AOSL's primary competitors in low-voltage MOSFETs, also posted stellar results, with revenue of $410M and adjusted EPS of $0.40 vs. the consensus of $399M and $0.31. Forward guidance was above consensus. Importantly, the company says channel inventory continues to be in the middle of the range while gross margin will continue to improve, indicating healthy industry conditions for suppliers.

So, I expect AOSL to post stellar results. It will also be their first quarter to report as a public company so you can be sure that they and the analysts sandbagged the results. I would not be shocked to see the stock regain its IPO price of $18, although given that Fairchild is only up 5% despite posting great results and being cheap on an absolute basis, there really is no telling what the reaction will be. Regardless of the reaction, this looks like a good one to own if the MOSFET market continues to stay healthy.



Disclosure: Long AOSL

According to iSuppli (via Barron's TechTrader blog), several key PC semiconductor products are in critically short supply, including the low voltage MOSFET's that are AOSL's specialty. Lead times are extremely long with suppliers gaining greater pricing power. While the market seems to be pricing in significant estimate cuts, the reality on the ground seems to be that they may even have room to come up.

It's a bit hard to square these kind of industry dynamics with AOSL's rock-bottom 3.5x EV/FY 2011E EBITDA valuation. Or the valuation of FCS, VSH and IRF for that matter.


Disclosure: Long AOSL