Microsemi Corporation (MSCC) Stock Is a Screaming Buy Nobody Understands

Advertisement

Shares of Microsemi Corporation (NASDAQ:MSCC) perked up after Goldman Sachs analyst Mark Delaney upgraded the stock last week to a “buy” and slapped a fresh $55 price target on the stock.

Microsemi Corporation (MSCC) Stock Is a Screaming Buy Nobody Understands

Source: Shutterstock

The upgrade means Goldman now joins almost all of the other major firms on Wall Street who have a “buy” rating on MSCC stock. In fact, the Street in general is much more bullish on MSCC stock than Goldman Sachs is.

Goldman’s new price target implies roughly 11% upside from today’s price. The consensus price target on the Street is $63, roughly 30% higher than where MSCC is currently trading.

But does all this analyst bullishness make the stock a buy? While it isn’t good to always follow the analysts, they have it right on this one. MSCC stock is a buy here.

Here’s why.

Microsemi Is Unique In the Best Way Possible

Microsemi Corporation employs a unique, M&A focused business model in the rapidly growing semiconductor space. This business model allows them a valuable balance between growth and diversity. It gives Microsemi the ability to touch all parts of the semiconductor market, allowing for seasonal strength in some markets to offset seasonal weakness in others.

This diversification helps smooth out MSCC’s financial results and gives management exceptional visibility into growth over the next several years. Whereas many other semiconductor companies are victim to capex spend in very particular end-markets, MSCC derives its growth from multiple end-markets.

On its most recent call, Microsemi CEO Jim Peterson said that between aerospace, defense and data-center, almost 50% of the company’s business should accelerate into 2018. Peterson believes that will allow the company to achieve its long-term 6% to 8% organic growth targets.

With Microsemi, then, investors are getting two things rarely packaged with a semiconductor stock — stability and predictability. That alone makes MSCC stock an interesting investment idea.

But MSCC stock is more than interesting here. It is a screaming buy.

MSCC Stock Is Grossly Undervalued

This year has been great for the MSCC. In its most recent quarterly report, revenues increased 17% year-over-year, with growth being driven across all major segments (Data Center, Industrial, and Aerospace & Defense). Gross margins increased 64.1% YoY, while operating margins wafted up by 15.6%. Earnings per share, too, increased 36% to 91 cents over the year-ago period.

Yet despite this robust growth, MSCC stock has slid near-10% in 2017. How does that happen?

It shouldn’t, and the disconnect is creating a compelling buying opportunity into what looks like the hidden gem of the semiconductor industry.

Yes, there are some macro concerns about a slowdown in the semiconductor space, particularly in the opticals space. Just look at the stock charts for Acacia Communications, Inc. (NASDAQ:ACIA), Oclaro, Inc. (NASDAQ:OCLR), and Finisar Corporation (NASDAQ:FNSR) to observe investor concern about this slowdown.

After big run-ups last year, each of these stocks has struggled this year as wireless capex markets have seen a pause in China due to a 4G wind-down. Year-to-date, OCLR is up just 3%, while FNSR is down 14% and ACIA is down 34%.

But MSCC has shown incredible resilience to this pause. Management noted on the call that while the wireless slowdown in China is a headwind, it’s being offset by a shift of spending into wire-line applications and the continued emergence of 100-gig deployments in China and North America.

Again, we are seeing the benefits of MSCC’s unique M&A focused business model. It allows for product and market diversity to offset market-specific headwinds.

That means the top line should continue to grow at a 6% to 8% rate over the next five years. Operating margins should also continue to expand, as management sees operating margins hitting 35% in the long-term (up from 30.8% so far this year).

Margin expansion coupled with mid-to-high single digit top line growth should result in low double-digit to low-teens earnings growth. The Street thinks it will be more like 15% annualized growth over the next five years.

But MSCC stock only trades at 11.2 times its FY18 consensus EPS estimate. That means the stock is trading at a considerable discount to its projected growth.

I like that setup, especially considering Microsemi is a cash-flow machine. It is a high cash-flow rate and low-capex-rate business, so that means there is lots of free cash flow for shareholders. In fact, this year, management expects free cash flow to exceed $400 million.

All in all, there is a lot to like both about Microsemi’s business and MSCC stock. The company is growing at a healthy rate on the topline, margins are expanding, cash flows are healthy and the valuation is relatively cheap. All together, that makes MSCC a buy.

MSCC is the hidden gem of the semiconductor industry. The stock should appreciate considerably over the next several quarters.

As of this writing, Luke Lango was long MSCC. 


Article printed from InvestorPlace Media, https://investorplace.com/2017/07/microsemi-corporation-mscc-stock-is-a-screaming-buy-nobody-understands/.

©2024 InvestorPlace Media, LLC