Tech Beat: Two small cap chip companies
There’s no getting around it: the semiconductor industry is volatile. Companies in this sector regularly face not only severe competition and frequent price cutting, but must navigate severe boom-and-bust cycles marked by spurts in demand for new products followed by dry spells and product delays that make it challenging for even the largest chip makers like Intel Corp. (Nasdaq: INTC) to project future business.
For the smallest players in the sector, these competitive challenges are often magnified.
Still, chip companies, when they carefully selected, can make excellent investments. Chips are a part of life, not only in computers, but in lots of basic consumer goods like cars and washing machines, and a surprising number of low-tech items, like alarm clocks. And on the high-tech front, new and improved chips are constantly being developed for mobile communications applications.
Two small caps to watch are TriQuint Semiconductor Inc. (Nasdaq: TQNT) and Mindspeed Technologies, Inc. (Nasdaq: MSPD).
TriQuint Semiconductor
TriQuint Semiconductor is a good small cap chip company to bet on. For starters, the Hillsboro, Ore. company serves a couple of the fastest growing industries, with a lot of its business devoted to developing chips for the mobile phone segment and the broadband communications business. In addition to high-tech markets, the company also makes semiconductors for the military. And, it has a pretty strong track record of sales and earnings growth.
TriQuint’s revenues last year rose sharply to $401.8 million, from $294.8 million in 2005. Net income totaled $21.8 million last year, up from $4 million in 2005 and a loss of $29.1 million in 2004.
TriQuint’s stock did take a hit in July when it reported soft second quarter results due to some charges for unsold inventory, which caused net income to drop to $1.4 million from $5.6 million. But even in that disappointing quarter, revenues grew 18% to $113.8 million from $96.3 million.
Judging from investors’ response to the second quarter weakness, they are still optimistic about the company’s long term potential. TriQuint’s stock, which traded recently at $4.24 per share, compared with $4.49 at the start of the year and $4.38 a year ago, is essentially flat for the year, despite the blood bath in recent weeks that has sent so many stocks to new lows.
Five of the ten analysts who follow TriQuint have a “buy” recommendation on the stock, and Matrix Research earlier this year upgraded the stock to “strong buy,” from “buy.” The seven analysts who provide revenue and earnings estimates have a mean revenue forecast of $466.9 million in 2007 and $520.1 million in 2008, versus $401.8 million in fiscal 2006. They project net income will grow to $0.24 per share this year, and $0.39 next year, compared with $0.22 last year.
Mindspeed Technologies
Like TriQuint, Mindspeed Technologies, Inc. (Nasdaq: MSPD) has managed to keep its stock price nearly unchanged over the past year, and has even rallied in recent weeks. The stock is now trading at about $1.72, compared with $1.82 at the start of the year, and $1.76 this time last year.
The Newport Beach, Calif. company that also specializes in developing chips for high-tech sectors like broadband and communications is currently losing money, but it is on the track to profitability.
Mindspeed’s net loss last year shrunk to $21.3 million from prior losses of $61.6 million in 2005 and $92.9 million in 2004. Revenues, meanwhile, have grown to $135.9 million in 2006, from $111.8 million in 2005 and $119.4 million in 2004.
And Mindspeed has continued the trend toward higher revenues and smaller losses in recent quarters. Revenues in its latest quarter ended in June rose to $33.2 million, from $30.8 million in the prior quarter, while its net loss narrowed to just $2.5 million from $7.6 million in the prior quarter.
The current year looks to be a somewhat challenging one for Mindspeed, which is in the process of an accounting adjustment for inventory write-offs from past years. Six analysts who provide forecasts are estimating revenues will decline slightly to $128.5 million from $135.9 million last year, and that its net loss will narrow to $0.09 per share from $0.14.
But they see 2008 as a strong rebound year, with the company achieving a $0.07 per share profit on revenues of $152 million.
