Wednesday, August 19, 2009

Forbes: Buy TriQuint Semiconductor (TQNT)

I tend to get nervous when mainstream publications start touting stocks I like, but I still like the thesis too much to avoid at this point. In fact this is one of the few real secular growth stories I can find. We mentioned this space a few times [Jul 23, 2009: Positive News Out of RF Semi Space - TriQuint Semiconductor, Skyworks Solutions] but one thing I did not touch on is the low stock prices. Don't be fooled by $4-$5-$6 stocks - these are rather large companies; they simply were part of the NASDAQ euphoria in 1999 when a company's stock would rise so quickly they would split 2:1, or 3:1 every 3-4 months. (I was a genius back then, let me tell you...) So when the bubble burst you had tons of shares outstanding and to adjust to a sensible market cap your stock price has to drop. Honestly at this point, I'd like these companies to do reverse splits ... usually that is a sign of weakness but not in this specific situation. I usually avoid stocks this low in price because there is a very good reason they are in the $5 range but again - these are exceptions. TriQuint Semi and RF Micro Devices (RFMD) are both over $1B in market cap!

As I said yesterday, while I think the semiconductor space could lead the US correction (when and if), a subset of this sector ironically is probably my favorite space right now. I sold a tad today because the stock ran up quite a bit yesterday and I want to buy on dips, sell on rips if I can. If Larry Summers allows the stock market to correct, I'd like to load the boat down there at the 200 day moving average or around $5. $6 would be nice on a shallower pullback. Speaking of Larry - hey it's 3:45, time to get to press "buy buy buy" button.

Forbes writer Darcy Travlos is on the same wavelength as we are.
  • Smart phones will drive new technology adoption and change user behavior around technology. Therefore, those companies that supply into smart phones are particularly interesting in this cycle.
  • A relatively less well-known company, TriQuint Semiconductor, is a supplier to Apple's iPhone. It makes Radio Frequency semiconductors for three markets: handsets, networks and military. The percentage of revenues earned in the handset market has been increasing sequentially, from 48% of revenues five quarters ago to 65% this past quarter, driven by the growth in smart phones and 3G.
  • TriQuint supplies to all the major smart-phone makers (including Apple, Research in Motion, and HTC) with the exception of Nokia. Not supplying to Nokia isn't a huge concern as Nokia's overall smart phone market position continues to deteriorate thanks to TriQuint's other customers. And TriQuint could yet win Nokia as a customer.
  • TriQuint's handset revenue increased 56% from the first quarter and 77% from the quarter a year ago. Just to reiterate: TriQuint's handset revenues increased 77% from a year ago during a terrible financial crisis such that most companies in most sectors reported negative comparisons to the period a year prior.
  • TriQuint's stock has several areas of momentum currently, in my opinion. First, TriQuint had a very difficult March quarter due to excess inventory in the channels, which appear to have been worked off through this past quarter. That bodes well for demand for TriQuint's products into the end of the year as smart phones continue to ramp into the seasonally strong second half of the year. TriQuint's bookings increased as well quarter over quarter to 1.22 times billings in the June quarter.
  • As demand increases, TriQuint's capacity utilization in their fabs should continue to increase from a very tough 35% in the March quarter to 66% in this past June quarter and perhaps greater going forward. Capacity utilization was 83% last year in the September quarter. (this is very key to profits! It is like an airline flying half empty) Increased capacity utilization translates directly into increased gross margins for the company. The management has a long-term objective for 40% gross margin vs. 32% last quarter, and the goal becomes increasingly within reach as revenues increase.
  • Second, in the past several earnings conference calls, management has discussed cost-cutting measures undertaken at the company, and its focus on cost containment. In stark comparison, cost cutting was not mentioned in the prepared comments of this past quarter, as management was focused on growth in the handset and military businesses and stabilization in the networks business. This is a subtle indication that management feels better about visibility; 89% of next quarter's guidance is already booked.
  • Finally, the company has a relatively small market capitalization ($975 million) with less research coverage than its competitors, which means that its investment opportunity is less broadly known. Current consensus earnings have the company more than doubling earnings from 2009 to 2010, from $0.23 to $0.49, and even these may prove conservative with the growth in smart phones.
  • Case in point: Smart phones drive data use, which require increased radio frequency content from $0.90 to $1.50 per handset to $6.00-$8.00 per smart phone. Yet, even at the consensus estimates, TriQuint is currently trading at 13.2 times forward earnings based on Friday's close of $6.49, less than most other semiconductor suppliers into smart phones, and gives investors 113% growth in earnings.
  • If the company continues to execute upon the smart phone opportunity and in line with management targets, the company has the potential to earn better than consensus earnings in 2010, with earnings potential of $0.55, or earnings growth of 139%. By applying an earnings multiple of 16.3x, the stock could easily retrace and exceed previous highs to $9.00, a nice return from current levels.
[Jul 24, 2009: Bookkeeping - Beginning TriQuint Semiconductor and RF Micro Devices]

Long TriQuint Semiconductor, RF Micro Devices in fund; long RF Micro Devices in personal account

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