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Technology Stocks : Rockwell-Spins off Conexant (CNXT) -- Ignore unavailable to you. Want to Upgrade?

To: David W. Taylor who wrote (1758)	10/30/2000 2:22:08 PM
From: The Ox	Respond to of 2013

Conexant: Sum-of-the-Parts Looks Attractive 30-Oct-00 13:18 ET [BRIEFING.COM - Robert J. Reid] With the tech sector in an extended funk, it takes courage to go bottom fishing looking for value. Conexant Systems (CNXT 23 11/16) is an interesting play that we believe is undervalued at current levels. The company is adhering to shareholder pressure and unlocking the value of its Network Access Division, its crown jewel. We believe the value of just that division is worth more than the current market cap for the whole company. There are concerns with the stock, but we believe the stock is at an attractive entry point for long term investors. Key Points The key to buying shares of CNXT is its announcement that it will spin-off its Internet infrastructure business or Network Access Division (NAD). NAD focuses on providing chip and software solutions for Internet infrastructure equipment makers. The spin-off will unlock the value of the division which deserves a much higher multiple than CNXT's personal networking applications which are comprised of four other product divisions: wireless communications, digital infotainment, personal imaging and personal computing. It is expected that the IPO will be for 20% of the division in January 2001 with the remaining 80% to be spun-off in the summer of 2001. In our opinion, the value of the Network Access Division is worth more than the current market cap for the whole company. Let's look at a couple of competitors in that space: Applied Micro Circuits (AMCC 129) and Vitesse Semiconductor (VTSS 62 1/4). AMCC and VTSS are trading at LTM price-to-sales ratios of 68.6x and 25.3x, respectively. NAD reported $579.2 million in sales in the just completed fiscal year. If NAD would trade at only half the p/s multiple of the lower VTSS, that would translate into roughly $32 per share. That would be the most conservative comparison as we would expect a higher valuation as NAD's 109% top line growth rate is closer to AMCC's 119% yoy growth rate than VTSS' 57% yoy growth. A price-to-sales ratio of 30x would translate into $76 per share. We do concede, however, that it will be difficult for NAD to maintain that growth rate as its sales base increases. NAD's sales are more than twice that of AMCC. Even with all three of these stocks trading down over the past couple of months, the spread in the valuation of NAD relative to the other two has remained constant. It's not all clear sailing for CNXT as the company guided DecQ and fiscal 2001 revenue and EPS lower as a result of weakening demand in digital cellular handsets and consumer PCs. While NAD is also affected, the personal networking business is being hurt more than NAD. The company expects NAD's sequential revenue to grow in the mid-single-digits in DecQ vs 10% lower for the personal networking business. Another concern has to do with the spin-off generating a high float. Twenty percent of the company will create a float of 45.6 million shares which is on the high side for an IPO. The stock has taken quite a beating over the past month so we believe much of the bad news relating to the slower cellular and consumer demand is in the stock. (see chart) Conexant is the world's largest independent company focused exclusively on providing semiconductor solutions for communications electronics. While the outlook for DecQ is not promising, the company's forecast for 2001 is more bullish as company continues to improve their competitive positioning through acquisition. The way to look at Conexant is to value NAD which should trade at least at the same price as CNXT does when the company spins it off. Then you get the remaining personal networking business for free. In our view, the sum of those businesses is higher than the current market value and makes for an interesting opportunity.