Micrel Inc. / (MCRL-NASD) $11.02
Micrel Incorporated designs, develops, manufactures and markets a range of analog power integrated circuits (ICs), mixed-signal and digital ICs. The Company ships over 2,000 standard products, and derived the majority of its product revenue for 2003 from sales of standard analog and high-speed communications ICs. These products serve a range of end markets including cellular handsets, portable computing, enterprise and home networking, wide area and metropolitan area networks and industrial equipment. The Company also provides custom and foundry services, which include silicon wafer fabrication, IC assembly and testing. Its custom circuits and wafer foundry services are provided to a range of customers that produce electronic systems for communications, consumer, automotive and military applications.
The company is based in San Jose, California. Its website is
NOTE: Micrel Inc.’s fiscal year ends on December 31st; analysts seem to use calendar year (CY) and fiscal year (FY) interchangeably.Key Positive Arguments / Key Negative Arguments
- Micrel has made significant progress in cutting costs during the cyclical downturn.
- Ethernet has been a source of growth for the company.
- Despite questionable end market demand, gross margins were up in the 3rd quarter.
- Softening demand and inventory pressures have taken a toll on the entire analog group.
While Several analysts like the stock in the long-term almost all analysts remain concerned in the near-term that softening demand and inventory pressures are persisting in a fashion typical of a cyclical downturn. Until these concerns are alleviated expect to see more holds than buys for the entire analog group.
Third Quarter Results and Fourth Quarter Guidance
On October 21st MCRL reported financial results for the quarter ended September 30, 2004. Micrel's third quarter revenues of $67.9 million increased 27 percent from the $53.4 million reported in the year ago period, and declined 2 percent from the $69.0 million reported in the second quarter of this year. Third quarter revenue was consistent with the updated guidance the Company provided on October 1, 2004.
Third quarter net income was $7.5 million or $0.08 per diluted share, compared with net income of $1.6 million or $0.02 per diluted share in the year ago period and $14 million, or $0.15 per diluted share in the second quarter, which included a $6.3 million after-tax benefit from one-time credits, equivalent to $0.07 per diluted share. Included in third quarter net income was $596 thousand of non-cash, pre-tax deferred stock compensation expense and an additional $437 thousand charge related to the exit of the Company's Santa Clara, California wafer fabrication facility. The charge is associated with the continued softness in the Silicon Valley commercial real estate market, which has prevented the Company from sub-leasing the facility.
Based on current backlog levels and demand projections, the Company estimates that fourth quarter 2004 sequential revenues will be approximately flat. At this time, Micrel estimates that fourth quarter revenue will be in a range of $65 million to $69 million. Depending on level of revenue and sales mix, fourth quarter earnings per diluted share are projected to be between $0.07 and $0.09.
Revenue Breakdown by End Market Segment
Wireless Handsets (26% of Sales)
Wireless was up 6% quarter over quarter following a 29% sequential increase, with strength seen in the higher end. The company expects the handsets to be flat in the 4th quarter.
Computing (24% of Sales)
Computing was down 6% due to general weakness in enterprise spending. The company expects this segment to be up sequentially with improvements in notebooks and enterprise servers.
Wireline (27% of Sales)
Wireline grew 21% in the 3rd quarter with strength in the Ethernet business, where order rates were up 50%. Micrel indicated there is solid backlog on the Ethernet business, with no inventory build in the end markets they serve.
Industrial (21% of Sales)
Industrial was down in the 3rd quarter, mainly attributable to lower distributor sales to computing customers. Micrel expects industrials to be flat in the 4th quarter.
Gross margin was up sequentially from 48.5% to 49.0%. Gross margins strength was driven by lower revenue from low margin foundry wafers. Micrel has guided for gross margins to decrease to 48.5% in the December quarter due to continued inventory adjustments in communications and industrial accounts with slight growth in Ethernet and stable wireless end markets.
2005E Margins/ Gross Margin / Operating Margin / Net Margin
Low Estimate / 49.30% / 16.90% / 11.40%
High Estimate / 51.00% / 19.40% / 13.20%
2006E Margins/ Gross Margin / Operating Margin / Net Margin
Low Estimate / 53.20% / 25.60% / 17.10%
High Estimate / 53.20% / 25.60% / 17.10%
Earnings Per Share
Earnings Per Share came in at $0.08 per share in the Third quarter vs. $0.08 in the prior quarter. Most analysts adjusted their earnings per share estimates downward in the past 6 weeks due to the backdrop weakness and inventory adjustments in the industry.FY 2005 / FY 2006
Street consensus / $ 0.41 / $ 0.60
Low estimate / $ 0.34 / $ 0.60
Med estimate / $ 0.41 / $ 0.63
High estimate / $ 0.42 / $ 0.63
One analyst (JMP Securities) is optimistic longer-term and feels that Micrel can grow faster than the overall analog market through a focus on value-added high margin analog chips for high growth markets such as cell phones, high end standard analog, enterprise networking, and mobile computing.
Most of the analysts following Micrel view the company as one that has shed operating expenses during a very difficult economic climate, which will reap the benefits of a more profitable company once demand returns. Only one analyst maintains a Positive rating on the stock, six maintain a Neutral rating, and there are two negative ratings. The lowest target price is $7.50 (Smith Barney). The highest price target is $18 (Piper Jaffray).
Upcoming EventsDate / Event / Comments
Individual Analyst Opinions
Piper Jaffray-Outperform- ($18.00) Analyst believes Micrel delivered a solid quarter in what remains a challenging semiconductor environment. Price target is based on 5.0x CY2005 EV/Sales.
American Technology Research- Hold ($12.00) At 25x consensus CY2005 earnings American continues to favor National Semiconductor (NATI) over MCRL given the valuation is 16x CY2005 EPS.
SG Cowen – Neutral Analyst recently cut estimates due to weakness at Samsung. Report was less than a page.
Smith Barney-Hold ($13.00) Smith Barney’s positives include good cost controls, inventory levels under control, and a strong balance sheet. Negatives include bookings declined in 3Q, book to bill fell below 1.0 and lead times are below 4 weeks. Price target is based on 36x CY2005E EPS of $0.37.
Goldman Sachs- Neutral- Goldman believes the company’s Q4 guidance may end up being too optimistic in the face of customer destocking. Analyst also believes MCRL is exposed to standards based products such as Ethernet, which could pressure margins.
JMP Securities- Market PerformJMP maintains near term uncertainty continues from key end markets. Further the analyst believes the stock is fairly valued at current levels. (35x 2004 EPS, 24x CY2005 EPS)
Lehman Brothers- Equal Weight ($12.00) Analyst remains concerned given few signs of holiday pick up, lack of visibility, and ASPs, which may be the next leg of the stool to crack if demand does not improve. Price target is based on 33x next years EPS forecast of $.034.
Bank of America-Sell ($7.50) Bank of America maintained its sell rating despite strength in Ethernet, because the analyst feels management’s outlook is predicated on improving orders throughout the DEC quarter and minimal impact of production cuts on GMs. Price target is based on 3x CY2005 sales estimate of $248.0 million.
Deutsche Bank- Sell Analyst remains concerned that softening demand and inventory pressures are persisting in a fashion typical of a cyclical downturn.