[POWI] - Power Integrations
beaten down, fundamentally sound
from chatfield.com [click on stock picks]
>>POWI is currently trading at a P/E of 19.6, a Price to '98 estimated earnings ratio of 17.0, and an estimated P/E to
growth ratio of 0.65. POWI completed its IPO in December 1997 at $8.00 per share with Hambrecht &Quist. We
believe POWI is currently undervalued.
1Q'98 revenues were $14.4 million, almost double the same quarter in 1997. 1Q'98 EPS were a strong $0.15/share
($0.13 if taxed at 35% on fully diluted shares).
Profitability is strong with a gross profit margin of approximately 45% and a pretax margin of approximately 18%.
Power Integrations has developed a unique patented single chip product called TOPSwitch for use in power
conversion units. These chips are purchased by original equipment manufacturers and power supply companies in
the cellular telephone, PC, and consumer electronics markets.
The Company has a competitive advantage due to its smaller and more efficient designs. New product introductions
during the second half of 1998 will provide greater integration and increased energy efficiency.
OVERVIEW
Power Integrations, Inc. (POWI) is a fab-less semiconductor developer, and marketer of highly integrated, proprietary analog
circuits used to convert high-voltage, alternating current (AC) to low-voltage, direct current (DC) in an energy-efficient manner.
The Company's proprietary TOPSwitch family of integrated circuits (ICs) are key enabling components in power supplies used
for cell phone chargers, desktop PC's and peripherals, television set top boxes for cable and direct broadcast satellite,
televisions, and other consumer electronics.
TOPSwitch is available in 13 different configurations and accounted for 92% of the Company's 1997 sales of $46 million.
During 1997, the Company introduced TOPSwitch II, consisting of 7 products that provide lower cost and improved
performance. The TOPSwitch family of ICs range in power output from 0.5 - 150 watts with input voltage from 85-265 VAC.
The Company's strategic plan is to focus on high volume markets that require small, lightweight, and efficient power conversion
devices, such as cellular telephones, PCs and peripherals, and consumer electronics. The Company is a "fab-less"
manufacturer, meaning the integrated circuits are manufactured in Asia and the Company does final testing and shipping.
SUMMARY AND INVESTMENT THESIS
The Company has 12,086,964 shares outstanding (as of April 30, 1998), plus 443,000 warrants and 926,000 options. This
gives a fully diluted number of shares outstanding of 13,455,964.
We believe that Power Integrations could have fully diluted EPS (adjusted for 35% tax rate; not using the Treasury Stock
Method of calculating EPS) of approximately $0.53 in 1998 and $0.68 in 1999. In general, the stock prices in the sector are
somewhat depressed, trading on average at a 25 P/E and a P/E to expected growth ratio of 0.88. Based on the assumption
that the sector will recover in the second half of 1998 and trade closer to its average expected long-term growth rate, we
believe the stock could trade at a P/E of approximately 30X by the end of FY'98, indicating a 6-month price target of $16 per
share. Based on the following investment considerations, we recommend an investment in POWI shares with a STRONG
BUY rating for growth oriented investors willing to assume some risk.
Strong quarter ended March 31, 1998: Strong Outlook. Power Integrations, Inc. reported 1Q'98 revenues of $14.4
million, compared to $7.1 million in the same period a year ago. Net income was $1.98 million or $0.15 per diluted share or
$0.13 per share as adjusted. Gross profit margin was 44.7%. The Company expects to maintain current gross margin levels
going forward.
In terms of outlook, Power Integrations usually enters a quarter with approximately 50-70% of its expectations in backlog. The
Company indicated that it entered 2Q'98 with backlog levels at the higher end of the 50-70% range. This gives us confidence
in expected 2Q'98 results. Power Integrations continues to build momentum for the future, with approximately 300-350 active
programs, and an estimated 100-150 additional programs in the design pipeline.
Stock price has suffered due to Asian worries and semiconductor concerns. POWI's stock price went from a high of
$14.38 on 4/15/98 to its current $9.38 price. As well, many analog semiconductor companies have seen recent declines in
their stock prices, possibly due to concerns over large PC inventories and possibly due to Asian concerns.
The Company has projected that in 1998, approximately 45% of its revenues will be to companies that include their ICs in cell
phone chargers (approx. 20%), desktop PC standby power supplies (approx. 25%) and TV set top boxes (approx. 3%). The
remainder of the Company's revenues are fairly diversified across several product categories; therefore, PC inventory and
general semiconductor industry concerns are expected to have less impact on POWI than on analog semiconductor companies
in general.
While the Asian market accounted for 60% of revenues in 1Q'98, the problems in Asia had little effect on the Company's
revenues and gross profit. The large revenues from Asia are due to the large concentration of merchant power supply
manufacturers in the region. The Company claims it has seen some pricing pressure due to the Asian crisis, but that since all its
manufacturing is done in Asia, it has benefited from a lower cost of goods sold. The Company sells all its products in U.S.
dollars and therefore has no currency exchange risk. According to the Company, its Asian customers primarily sell their end
products to U.S. or Europe OEMs, so they are somewhat hedged from currency exposure. In addition, while some companies
are experiencing weakened demand due to the Asian crisis, POWI is penetrating existing markets for consumable goods, and
is not totally dependent upon overall sales levels for the cell phone, PC, or other consumer electronics sectors, so it is
experiencing stable demand from Asia for the time being. However, there can be no assurance that the Company will not be
adversely affected by the Asian crisis if the situation worsens.
In addition, recently there has been a slightly higher volume of trading, possibly due to the release of the IPO lock-up
agreement on June 12, 1998 for 7.5 million registered shares, of which approximately 3 million are restricted under Rule 144.
This could have contributed to the downward pressure on the stock.
Current proprietary products offer significant advantages over traditional approaches. The competition for power
conversion ICs consists of manufacturers offering linear power supplies, discrete power supplies, hybrid chips, and other
integrated circuit solutions similar to POWI's. Linear power supplies are very inefficient, larger, and heavier than solutions using
the TOPSwitch products. Discrete power supplies are built with discrete components, such as resistors and capacitors. The
Company's integrated circuits typically replace 30-50 discrete components, which allows the resulting power supply to be
much smaller, lighter, and in most cases, less expensive to manufacture. Hybrid chips are manufactured by Sanken Electric in
Japan, and are used primarily for television main power supplies. The Company doesn't view Sanken as a major competitor,
since the Company's products are mainly used in standby power supplies in televisions, not the main power supplies. There are
two other companies offering integrated solutions, STMicroelectronics N.V. (NYSE: STM) and Motorola (NYSE: MOT).
POWI has a significant advantage over these competing products in that the competing products have a die size 1.7 times
larger than the Company's die size. This gives POWI a fundamental cost advantage, because less silicon is needed. In addition,
the Company believes it has an edge over the competition due to its thick patent protection (22 U.S. patents, and 35 foreign
patents), and its strong customer and applications engineering support.
However, since the TOPSwitch requires a proprietary power supply design, any potential customer would only change designs
if the cost of the Company's IC is similar or lower, and there are other competitive advantages.
New product in the 0-5 watt market is expected to be launched in 2H'98. The sub-5 watt market consists mainly of
consumer products. This market could be a large revenue driver for the Company going forward. There are also new
consumer products being introduced that will expand the size of this market. For instance, cell phone battery chargers are
beginning to operate in the sub-5 watt range, and there is a trend towards increased use of standby power supplies for PCs,
TVs and VCRs. These low power devices will be positioned as a replacement for small linear power supplies. The primary
advantage of the sub-5 watt power conversion integrated circuits is they are expected to be more energy efficient, smaller,
lighter, and at a cost equal to or less expensive than the linear power supplies that are currently in use. Even though these
products are expected to sell at a much lower cost than the Company's current TOPSwitch products, Power Integrations
believes it will be able to maintain its current gross profit margins.
Large potential market. The market for 5-150 watt power supplies is estimated by the Company to be 800 million units in
1998 or revenue of $640 million, and the market for 0-5 watt power supplies is estimated to be 500 million units in 1998 or
revenue of $225 million. This includes power supplies used in cell phones, televisions, VCRs, PCs, TV set top boxes,
electronic household appliances, and industrial controls. Industry growth is expected by the Company to be 12-15% per year.
Market growth can arise not only from the inherent expansion of the market, but can also arise if new ICs become cost
effective at additional power levels. <<
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Bo |
