Can Semtech Jump-Start Profits for Your Portfolio?

Source: Thinkstock

Source: Thinkstock

Semtech Corporation (NASDAQ:SMTC) is probably not being discussed at the dinner table at homes in America, but it is a profitable company that investors should be aware of. It designs, develops, manufactures, and markets analog and mixed signal semiconductor products. Its products lines include signal integrity and timing products, such as a portfolio of optical communications, broadcast video, active cable transceiver, and backplane products used in various enterprise computing, industrial, communications, and high-end consumer applications. It makes proprietary advanced wired communication and ultra-high speed serializer/deserializer products for optical transport communication used in various communications and industrial applications. The company also offers protection products comprising filter and termination devices that are integrated with the transient voltage suppressor devices to provide protection for electronic systems. In addition, it provides power management products that control, alter, regulate, and condition the power supplies within electronic systems.

The power management product line includes switching voltage regulators, combination switching and linear regulators, smart regulators, and charge pumps, which are used in industrial, military, medical, automotive, aerospace, and defense systems, including satellite communications applications, as well as consist of discrete semiconductor products, such as rectifiers, assemblies, and other products. Further, the company offers wireless and sensing products, including a portfolio of specialized radio frequency functions used in various industrial, medical, and networking applications, as well as specialized sensing functions used in industrial and consumer applications. It serves primarily original equipment manufacturers that produce and sell electronics. The stock has caught my eye after exploding up 20 percent in just one month. Why has this happened and can it continue? An analysis of the company’s recent performance sheds some light on this inquiry.

Well, net revenue for the first-quarter of fiscal year 2015 was $132.9 million, down 18 percent from the first-quarter of fiscal year 2014, and up 5 percent from the fourth-quarter of fiscal year 2014. Gross profit margin was 58.8 percent compared to 59.9 percent in the comparable quarter last year and 42.5 percent in the fourth-quarter of fiscal year 2014. GAAP net income was $7.9 million or $0.12 per diluted share. This compares to GAAP net income of $14.8 million or $0.22 per diluted share comparable quarter last year and GAAP net loss of $210.8 million or ($3.12) per diluted share in the fourth-quarter of fiscal year 2014. It is important to note that included in the GAAP operating results for the fourth-quarter of fiscal year 2014 were charges that included non-cash items of $146.6 million for the impairment of goodwill and other intangible assets, $15.0 million for inventory reserves, $9.2 million for fixed asset impairments, and $4.9 million of one-time cash items associated with severance and contract cancelation liabilities from restructuring and realignment activities.

Turning non-GAAP net income for quarter, the company brought in $21.8 million or $0.32 per diluted share. Non-GAAP net income was $31.3 million or $0.46 per diluted share in comparable quarter last year and was $15.5 million or $0.23 per diluted share in the fourth quarter of fiscal year 2014. Non-GAAP gross profit margin was 59.8 percent. Non-GAAP gross profit margin for comparable quarter last year was 61.6 percent and 59.6 percent for the fourth quarter of fiscal year 2014. The company is flush with cash. As of April 27, 2014, Semtech had $244.3 million in cash, cash equivalents, and marketable securities. This compares to $236.4 million in cash, cash equivalents and marketable securities at the end of the first-quarter of fiscal year 2014 and $246.9 million in cash, cash equivalents, and marketable securities at the end of the fourth-quarter of fiscal year 2014. Mohan Maheswaran, Semtech’s President and Chief Executive Officer, stated:

Semtech delivered Q1 results at the upper-end of guidance as we benefited from strength in our high-end consumer and enterprise computing markets. Bookings were strong during the quarter and we enter Q2 with a higher sequential backlog. We are pleased with our pipeline of new innovative platforms, our new product introductions, and our continued design win momentum which we believe will drive future growth for us.

As we can see, sales are up, earnings are up, but what will drive the stock going forward is if the company can continue to deliver. Well, net sales for the current quarter are expected to be in the range of $138.0 million to $146.0 million and GAAP gross profit margin is expected to be in the range of 59.3 percent to 60.3 percent. Non-GAAP gross profit margin is expected to be in the range of 59.6 percent to 60.6 percent. GAAP general and administrative expense is expected to be in the range of $31.4 million to $32.4 million while GAAP research and development expense is expected to be in the range of $28.0 million to $29.0 million. Thus, GAAP earnings are expected to be in the range of $0.18 to $0.24 per diluted share while non-GAAP earnings are expected to be in the range of $0.36 to $0.42 per diluted share. Given the results the company is delivering, coupled with the expected results the company hopes to deliver in the coming quarter, the stock seems like a solid buy going forward.

Disclosure: Christopher F. Davis holds no position in Semtech and has no plans to initiate a position in the next 72 hours. He has a buy rating on the stock and a $35 price target.

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