O2Micro Shares Worth Triple Current Value

| About: O2Micro International (OIIM)

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O2Micro (NASDAQ:OIIM), with an enterprise value of $17 million and 2013 sales of $74 million, looks interesting especially given last week's acquisition of a competitor. Microchip (NASDAQ:MCHP) announced on February 10, 2014, that it would be purchasing Supertex (NASDAQ:SUPX), at a $245 million enterprise value. Supertex had sales of $17 million and $2.7 million in profits in its December quarter, and by comparison O2Micro generated $19 million that same quarter. Granted O2Micro is losing money and is cash flow negative at the moment, but in all likelihood, Q1 2014 will be the last cash flow negative quarter and profitability could be 3-5 quarters away. When it does turn cash flow positive, there should be a minimum of $70 million in cash on the balance sheet or $2.50 per share.

O2Micro, founded in 1995, is a Cayman Island-based fabless analog semiconductor manufacturer that fell on hard times in 2011 as the TV industry rapidly shifted from CCFL LCD TVs to LED TVs. O2Micro had dominant market share for chips that did the backlighting for these TVs and a business that represented a very large portion of sales for the company is now expected to generate less than $500,000 this year. The good news is it can now only go to zero. A company that peaked at $138 million in revenues in 2010 has now potentially troughed in 2013 at $74 million. In 2014, we are expecting revenues to once again increase to over $80 million for the total company. O2Micro's management was blindsided by this rapid decline and over the past five quarters has had to slash the work force by 30% and operating expenses over 40% as it works its way back to profitability. After three years of declining revenues, in the fourth quarter just reported, revenues actually grew 14% and the loss was reduced by $5.9 million from the year before.

The company that remains is now over 50% backlighting chips but for LED TVs this time, as well at laptops and notebooks. They however do not dominate this business and must share the market with others, resulting in lower sales than they had historically. Backlighting chips generally cost $0.30-50 cents and there is one per TV. Although they cater more to the Chinese and Japanese market, TVs overall are not expected to grow much more than 3% so at best we can hope for a stable business here going forward.

The next largest part (35%) of the business is Power and Battery chips. The power chips are used in notebooks and laptop computers and arrive in your Dell (NASDAQ:DELL), HP (NYSE:HPQ), Sony (NYSE:SNE) or Lenovo (OTCPK:LNVGF) computer via a Quanta or Compal motherboard. A quarter of this group's business is DC/DC converter chips that are in the brick on your charger cord. This business is not that exciting because of course notebooks and laptops are not that exciting. In this business the company competes with TI, Intersil (NASDAQ:ISIL), Maxim (NASDAQ:MXIM) and Linear Technology (NASDAQ:LLTC). They are one of the top three suppliers for notebooks based on the Intel (NASDAQ:INTC) and AMD (NASDAQ:AMD) platforms. One bright spot in this group is 10% of group sales that sells to the portable tool and appliance business. These battery chips end up in Black & Decker (NYSE:SWK) power tools as well as Stanley, Makita (OTC:MKEWF) and Bosch among others. Here business is expected to grow over 30%.

The final piece of the company, that could reach 15% of sales in 2014, is the rapid grower---General Lighting, which sells to the LED light bulb market. O2Micro makes a small chip that goes on a small board on the base of the bulb. In the US it sells to GE (NYSE:GE) and Osram (OSAGF,), and in Japan to Toshiba (OTCPK:TOSBF) and Panasonic (OTCPK:PCRFF). This business should double this year and yield better than average margins.

All told, if the turnaround at O2Micro continues as planned the stock will appreciate to trade in line with it peers. However, at the same enterprise valuation to sales ratio as Supertex, which had $65 million in sales in 2013, O2Micro would be worth $279 plus $70 million in cash or a market value of $349 or $12.48 a share as an acquisition. While we do not believe O2Micro is for sale, at the current price of $3.34 per share a patient investor could be rewarded as investors see the value in the company as it returns to historical profitability.

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.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I work as a Consultant Analyst for Zacks Investment Research. The article is written by me and is 100% my opinion. I receive compensation from Zacks for writing equity research reports and providing valuation analysis on this company’s stock and expect to do so in the future. Zacks receives compensation from the company. Please see the Zacks Disclaimer for further information: http://scr.zacks.com/Disclaimer/default.aspx

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