Semiconductors Turn Profitable, Stocks Get Cheaper
    July 5, 2010  PSW Staff
    The last year has been a roller coaster ride for stocks in general, but scarcely has it been
    more dramatic than in the semiconductor space.  Over the past three months, one group of
    small integrated circuit, broad line and specialized semiconductor stocks has had an
    especially harrowing ride, losing half of their value after doubling during the trailing twelve
    months.  Meanwhile, these companies have turned earnings positive over the past quarter or
    two.  Valuations coming into existence may have contributed to the adjustment, but the recent
    sell off in equities as a whole has really taken it's toll on these issues, possibly making them
    cheap growth opportunities.

    LSI Corporation (LSI), which has around 650 million shares outstanding, lost 2.5 billion in
    2007, 600 million in 2008, 47 million in 2009 and has now actually earned 22 million in the
    first quarter of this year.  Despite the turn around, the stock now trades at a fifty two week low.  
    The P/E based on the recent earnings is a little high, but a forward P/E of 7.3 is below the
    specialized semiconductor industry average.  The company has a billion dollars, or $1.55 per
    share in cash and only 350 million in debt.  All segments of the company saw revenue
    increases last quarter with Storage Systems leading the way at 40%.  The company says the
    increase is due to a recovery from market weakness seen in 2009.

    Integrated Device Technology, Inc. (IDTI) has flirted with profitability in the past, but managed
    to earn a slightly more substantial 40 million last year or 24 cents per share. With only 162
    million shares outstanding, the company has a very solid balance sheet, with 2.11 per share
    in cash, and a book value of 3.73.  This stock is also trading at a 52 week low, likely due to
    their profits coming on decreasing revenues.  The flip flop in revenues and profits, however,
    was from making structural changes to the business that included several acquisitions and
    divestitures into supposed faster growing portions of the communications, computing and
    consumer electronics end markets.  Revenues did increase in the second and third quarters
    of last year as the economy slowly recovered.  Their fourth quarter, which has shown a
    sequential drop off in the past, saw a less than typical seasonal decline last year directly due
    to the structural changes made.  A P/E of 20 and forward P/E of 8 is well below the broad line
    semiconductor industry average of 25.

    Atmel Corporation (ATML), another broad line semiconductor, has also seen increasing
    revenues over the past year coupled with increasing profit margins.  Last quarter, the bigger
    profits finally resulted in the companies first net income since 2007. The stock has
    performed a little bit better than the other three in this story and is currently within 25% of a 52
    week high.  The premium may stem from the companies profit increases seeming more
    sustainable.  They have done a little bit of restructuring to with respect to market currents as
    well, but Atmel has mostly taken the head count reduction approach, hopefully becoming
    leaner and meaner.  The companies microcontroller segment has led the way driving
    revenues up 28% from the first quarter of last year on improved global conditions increasing
    demand.  A slight increase in profit margin was seen primarily from the increased productivity
    inherent to higher production levels.  The balance sheet touts a half a billion in cash on
    around half a billion shares outstanding with only 84 million in debt.  The stock has yet to
    sport a P/E, but they have been generating cash for a couple of years with cash flow
    accelerating to 70 million last quarter.  A forward P/E of 12 may be conservative and plenty of
    value may still remain in the stock, especially with the recent pullback.

    PLZ Technology Inc.(PLXT) is the smallest of the four companies and has a tiny float of only
    22 million shares.  The stock is right in the middle of it's 52 week range and has seen the
    same pattern as the others with a steep climb in the later part of last year followed by a steep
    decline over the last three months.  Despite it's small size, PLX has an impeccable balance
    sheet with $1.00 per share in cash and almost no debt.  As profits have come online over the
    past couple of quarters, little or no dilution has allowed shareholder equity to increase
    sequentially.  What is particularly interesting about this companies recent success is that as
    industry conditions have improved, PLZ has not been able to keep up with demand.  The
    supplier capacity constraints are expected to continue into the second quarter of this year,
    making for critical decisions going forward with the potential for unlimited growth.  Integrated
    circuits as a whole have a P/E of 36.  This company needs one more quarter of net income to
    get a positive P/E, and similar earnings to the last two quarters would bring the P/E online at
    just 8.  Another similar quarter after that would bring it down to just 4 or 5 using todays price
    and share count.

    All of these stocks have been heavily shorted over the last few months with ATML currently
    seeing the smallest percentage of short interest.  This seems to be a function of more
    volatility in the Technology sector leading to more enticing percentage swings as the overall
    market has declined. Semiconductors in particular have offered plenty of volatility and will
    likely rise more quickly when things turn around in the markets again.  These four stocks, all
    of which have recently started generating income and are heavily shorted are positioned to
    outperform even their semiconductor peers.
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