MCRL on H&Q Focus List:If you had to only buy one stock . . .
Excerpts from HQ Research 12/6/00:
* We believe a tough market environment and inventory fears have conspired to
create an extraordinary buying opportunity for MCRL
* MCRL's analog business model (highly diversified, highly proprietary)
combined with superior management track record give us maximum confidence in
our estimates
* MCRL is trading at ½ the PEG ratio of closest comparables, and about ½ it's
historical earnings CAGR
* We believe current discount is due to liquidity factors and not company
fundamentals* Re-iterate STRONG BUY rating, also on the Chase H&Q FOCUS
Price: 33
Recommendation: Strong Buy
Notes: a, b,f
Date: 12/6/00
1 of 2 If you had to only buy one stock . . .
* We believe a tough market environment and inventory fears have conspired to
create an extraordinary buying opportunity for MCRL
* MCRL's analog business model (highly diversified, highly proprietary)
combined with superior management track record give us maximum confidence in
our estimates
* MCRL is trading at ½ the PEG ratio of closest comparables, and about ½ it's
historical earnings CAGR
* We believe current discount is due to liquidity factors and not company
fundamentals
* Re-iterate STRONG BUY rating, also on the Chase H&Q FOCUS LIST
1999 A 2000 E 2001 E
Q1 EPS $0.08 $0.15 $0.25
Q2 EPS 0.09 0.19 0.27
Q3 EPS 0.10 0.23A 0.29
Q4 EPS 0.13 0.25 0.31
FY EPS 0.41 0.82 1.12
FY REVS (M) 195 325 443
CY EPS 0.41 0.82 1.12
CY P/E 80x 40x 29x
Why has the stock come down so hard? We believe the market has grossly
oversold MCRL stock due to investor concerns over
*macro NASDAQ issues (election, economy, earnings, valuation)
*slowing demand and excess inventory in the communications channel
Despite clear signs of an inventory correction in communications and a
slowing economic backdrop, our confidence in MCRL's earnings prospects is
undiminished. Two factors give us this confidence: MCRL's high performance
analog business model and an outstanding management track record.
Diversity is a lifesaver in the current environment. The biggest
advantage of the analog model in today's environment is diversity. For MCRL,
this means,*diverse endmarkets (e.g., Micrel plays in comm, PC, consumer,
industrial, foundry),
*diverse customer base (e.g., over 5,000 different customers and no 5%+
customers), and
*diverse product portfolio (e.g., sold over 1,400 different products inQ3).
In fact, MCRL has already experienced weakness in major endmarkets (e.g. CDMA
handsets in Jun-00, notebooks in Sep-00). Yet, its financial momentum has been
undiminished, as the company has successfully re-allocated capacity to other
markets which took up the slack. In addition, high performance analog products
have been in such high demand that MCRL and all of its major comparables
continue to report strong demand, capacity constraints, and a very "dry"
channel. We believe it would have been very difficult for communications OEMs
and sub-contractors to hoard high performance analog products over the past
few quarters, even if they wanted to, due to a high degree of sole-sourcing,
capacity limitations, and pro-active management of the channel on the part of
high performance analog companies.
Nobody does it better. MCRL has continued to deliver very brisk
sequential revenue growth and rising margins through extremely difficult
environments (including the PC inventory correction of 1996, and the Asian
crisis of 1998) - see Exhibit 3. Recently, MCRL's revenue growth and margin
expansion have accelerated, and we have raised our forward estimates
significantly during each of the last 8 quarters. As Micrel's management was
among the first to warn investors of the possibility of an inventory
correction in communications, we believe it is also likely to have anticipated
the issue and taken pro-active steps to protect the company from inventory
"blind-sides".
29x may not sound "cheap" these days, but it is a steal for MCRL. Micrel
has traded off nearly 50% during the last three months despite no change in
the company's current outlook. At 29x our CY01E earnings of $1.12, MCRL is
currently at "pre-cycle" levels (see Exhibit 1). In addition, Micrel is at a
relative discount to other leading high-performance analog competitors like
Linear Technology trading at 38x. We note that at the height of NASDAQ
optimism, MCRL has traded at a very substantial multiple premium to LLTC.
Why should MCRL trade at a lower PEG ratio than larger comparables?
MCRL's CY01E P/E multiple-to-growth (PEG) ratio based on our CY01 earnings
growth forecasts is 0.8, while LLTC is at 1.8 (see Exhibit 2). We note that
MCRL has compounded earnings growth at 60% since listing in 1994. Given more
critical mass and a secular acceleration of demand for high performance
products, we would argue that MCRL is likely to enjoy even faster growth in
the next five years than in the previous. On this basis, MCRL is trading at
close to half its sustainable growth rate. We strongly believe a lower PEG
ratio is due to an excessive "liquidity discount", - MCRL is about one-fifth
the size of LLTC by market cap, and about one-third by sales run rate. When
more positive sentiment returns to the group, we believe MCRL is likely to
once again command a premium to comparables due to the "scarcity factor" of
lower liquidity, as well as higher topline growth. We strongly re-iterate
our STRONG BUY rating and the stock remains on the Chase H&Q FOCUS LIST. While
we have no official price target on MCRL, we believe the stock offers the
potential for 2-3x upside and very little downside over the next 12 months. |
