The Jury Is Still Out Over Profitability of Microsemi’s Rapid Acquisition Pace
Having completed six acquisitions of other companies in the past 18 months and with two more in the works, Microsemi has filled its shopping basket to the brim.
But will the Santa Ana-based semiconductor-products company be able to digest all it has bought?
“The jury is still out on some of these” acquisitions, acknowledged David R. Sonksen, Microsemi’s vice president of finance. “We think things are going to go well.”
Evidence of the uncertainty is reflected in the price of Microsemi stock, which closed Friday at a 12-month low of $6.75 per share, down 50 cents for the week. The shares were trading for up to $11.75 before last month’s stock market crash.
The recent acquisitions are part of Microsemi’s ongoing strategy to strengthen its position in an unexciting but relatively stable niche in the semiconductor industry. The company’s main line of business is diodes, devices that control the direction and flow of electrical current in products ranging from telephones to jet aircraft.
Microsemi has financed its buying binge primarily through a $40-million bond offering last February.
Until recently, Microsemi has specialized in diodes for military and industrial customers. But its recent acquisitions will expand its presence into commercial markets.
Microsemi announced plans last week to acquire Chatsworth-based Diodes Inc. for $1.6 million. The firm manufactures low-cost diodes used in radios and televisions, which will be a new market for Microsemi. Diodes has a manufacturing plant in Taiwan, and Microsemi hopes to enhance its presence in the Asian market, Sonksen said.
Microsemi also said last week that it intends to acquire a money-losing subsidiary of Coors Porcelain. The subsidiary’s product line includes silicon wafers that can be used in Diodes’ products. The Coors unit also produces high-performance diodes used in automobiles and microwave equipment.
Joseph R. Garipoli, a New York stock broker who has followed Microsemi since 1980, likes what he sees in the recent acquisitions. “There’s a sense of optimism that Microsemi can do better with the subsidiary than Coors did,” said the partner in Ginsburg & Garipoli Securities. “They’ve taken bits and pieces of other businesses before and made them profitable.”
An example of that is Microsemi’s purchase in 1982 of a diode-making subsidiary of Siemens, the German electronics concern. The Arizona-based subsidiary was “losing millions” when Microsemi acquired it, according to Sonksen. But since then, sales have increased 50% and the unit is “contributing handsomely” to Microsemi’s bottom line.
In several weeks, Microsemi will report financial results for its fiscal 1987 year, which ended Sept. 30. Sonksen said revenues will be about $46 million, a 20% gain over last year’s sales. The company has not released earnings estimates.
But analysts expect earnings to be nearly flat. PaineWebber analyst Robert Sullivan is projecting 1987 earnings of $5.6 million, or 62 cents per share, compared to $5.5 million in 1986.
“I think that some of the acquisitions are taking too long to make money, or at least longer than the company is used to,” said Sullivan, who works in PaineWebber’s New York offices.
“But I’m not saying that they’re bad acquisitions. I think a lot of investors are wondering if these recent acquisitions are as good as the earlier ones. They have no way of knowing yet.”
Sullivan also noted that earnings were reduced by a recent expansion of the company’s Santa Ana manufacturing facility and the debenture offering earlier this year.
Analysts have high hopes for fiscal 1988, although earnings forecasts for Microsemi and many other companies have been lowered as a result of October’s stock market collapse and its possible economic repercussions. Several analysts who follow Microsemi expect earnings of $10.7 million, or 85 cents per share for the coming year.
If Microsemi is able to successfully absorb the acquired companies into its operations, analyst Garipoli said, earnings growth should begin to more closely track the company’s 20% to 30% annual revenue gains. “When that happens,” he said, “it’s like a slingshot” on earnings.
Joe Payne, an analyst at Alex Brown & Sons in Baltimore, said Microsemi has the potential to become a “great computer component company” with potential annual sales of $200 million to $300 million.
In the wake of Black Monday, Microsemi stock was quick to fall and has yet to recover. That is a common characteristic of many secondary stocks, which don’t receive as much investor interest as the shares of larger, blue-chip corporations. Secondary issues tend to decline more rapidly than the overall market and recover more slowly.
Uncertainty over fiscal 1987 earnings also has depressed the stock price, Sullivan said.
While analysts agreed that Microsemi shares are cheap at current prices, their views are mixed on its near-term appreciation potential.
“I don’t see that it’s going to make a run up anytime soon,” said Sullivan, adding that the stock should begin to appreciate after the company’s recent acquisitions start to pay off and the earnings outlook improves.
Garipoli, however, said his firm is recommending that clients purchase Microsemi and is even buying the stock for its own account.