The chips are dipping, and I'm getting hungry!
The entire semiconductor sector is highly cyclical and therefore susceptible to wild swings in demand and profitability. It's not uncommon for most of the companies in this sector to trade at lower forward price-to-earnings ratios than the majority of other sectors. But at some point we just have to say enough is enough and see these companies for the true values that they are.
Such is the case with Integrated Device Technology (NAS: IDTI) , an integrated-circuit manufacturer that services the computing, telecommunications, and consumer markets. Integrated Device reported fiscal first-quarter results last night that missed Wall Street's revenue expectations ($151.5 million versus $153.5 million) but were in line on an earnings basis ($0.12). However, digging deeper revealed a few bullish surprises that those who just read the headlines may not have seen and could be the key to extra profits for your portfolio.
While you were out ...
Yes, revenue fell by 4%, primarily caused by weakness from the telecommunications and consumer sector, but did anyone notice that gross margin rose again? With gross margins at 53.7% -- well above last year's 52.5% - Integrated Device has now grown its gross margin year over year for five consecutive quarters. This simply means that even if revenue isn't as robust as expected, its bottom line should remain strong.
Integrated Device was also able to improve its cash flow, which further enhanced the company's outstanding share-repurchasing program. Many investors would have overlooked this as just another $12 million decrease in total cash, but it's much more than just that. With no debt and $287 million in cash, Integrated Device is sitting on $1.94 in cash per share. This makes it not only an attractive candidate to weather cyclical downturns with ease, but also an attractive buyout candidate. Also, don't forget that repurchasing shares creates a favorable earnings bump, since there are fewer shares outstanding for profits to be compared against.
Let's take a look at how Integrated Device stacks up next to some of its closest rivals.
Integrated Device Technology
$287.2M / 0
Exar (NAS: EXAR)
$202.4M / 0
Analog Devices (NYS: ADI)
$3.43B / $906.9M
Cypress Semiconductor (NYS: CY)
$358.9M / 0
ON Semiconductor (NAS: ONNN)
$780.6M / 1.27B
Sources: Yahoo! Finance, Morningstar.
Much of the sector appears reasonably priced. Only Exar sports a lower return on equity than Integrated Device, and that's because it's currently not profitable on a trailing basis. ON Semiconductor trades at a lower forward P/E than Integrated Device, but it's also the only company of the five to have more debt than cash. Relative to its remaining two rivals, Cypress and Analog Devices, Integrated Devices simply trades closer to book value and appears to be a more enticing all-around value than the two.
Work to be done
Still, plenty of work remains for Integrated Devices to remain successful. Operating margins have been positive in just three of the past 10 years, so controlling expenses and keeping a watchful eye on industry trends is paramount to the company's success. But based on last night's quarterly report, I'd say the company appears to be on track once again, and if shareholders were wise, they'd take notice of this company's strong margins.
What's your take on Integrated Device Technology? Share your thoughts in the comments section below and consider adding Integrated Device Technology to your watchlist to keep up on the latest news with the company.
At the time thisarticle was published Fool contributorSean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong. Motley Fool newsletter services have recommended buying shares of Cypress Semiconductor. Try any of our Foolish newsletter servicesfree for 30 days.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policythat likes its chips with dip.
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.