I'll share an extract from the last issue of INFRASTRUCTURE (http://www.infras.com) where I wrote this on Exar after attending the H&Q conference a couple of weeks ago.......
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EXAR Corp. (EXAR)
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EXAR manufactures specialty, high-performance mixed signal integrated circuits. Communications is its biggest segment representing 42% of Sales in products like line interface, caller ID and speakerphone applications. For example, caller ID is growing at a 40% CAGR and the introduction into California this summer will keep the momentum going. EXAR also participates in the computer business through its imaging products which enjoy a 40% market share and 60% CAGR. Consumer products are 12% of revenues and include applications like smart battery management - another high-growth segment. Finally, 22% of revenues are from the instrumentation and automotive industries.
EXAR is mid-way through a very bold and aggressive restructuring by CEO George Wells and his staff. They took on the two-fold focus 4 years ago to drive for a leadership position in Quality and a significant increase in Gross Margin.
Quality results speak for themselves in that EXAR is one of only two semiconductor companies to achieve full QS-9000 certification! As for margins, Wells had driven these up from 30% in '91 to the 50% level in '96 by cutting off low-margin businesses that were draining the company. There were three businesses that were removed, and these represented almost $100M in annual revenues, so while the bottom line has improved, the top line has dropped. They exited from the wafer foundry business ($20-25M annually), commodity products for the Japanese market ($40M), and the hard disk drive business ($25M). Some of these lost revenues have been replaced by growth in the core mixed signal business, and by an acquisition strategy. A good example is their acquisition of Silicon Microstructures Inc. which specializes in Micromachined products such as sensors.
Now Wells describes the focus as shifting from margin improvement to revenue growth (while maintaining the good margins of course!). To do this will require execution of new product introductions into the right markets, and by further acquisitions as appropriate.
The company has a $12.58 / share book value and $6 / share in cash. Since December, they have bought back $13.5M in stock from the open market. When the 3rd quarter of FY'96 ended in Dec '95, the management stated they saw a slowdown ahead with poor visibility in a volatile market. This news caused the stock to drop from the $38 level to $13. It has now recovered to $17 and at this price is only at a 9.5x PE ratio for FY'96 and an estimated PE of 7.5x based on an EPS of $2.24 for the current fiscal year of 1997. Business appears to have stabilized and the turnaround is working, so this company is positioned well to get back to a PE of 12-14x and support a stock price around $30 by year end.
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Of course, all the standard disclaimers apply and do your own research, but this is one I like and have bought into recently.
Take a look at our site for more info on the industry.
Regards,
Ron Leckie |
