Valuation Disparity in the Power Amplifier Market

In the article about power amplifiers published a while ago on this blog, Laxman listed some companies who are leader in that market. I’ve always wondered why one of these companies, which is practically in my backyard, received lower valuation from the market and caused me to look deeper into the issue.

As shown in the graph below, the PE ratio of Triquent Semiconductor is lower than those of Skyworks and RFMD.

One possible cause of the disparity may be a difference in the products the companies manufacture, the markets they serve, the technology they employ to manufacture their products, or their business strategy. However, a closer review reveals that the three companies are more similar in these areas than they are different. All three companies manufacture power amplifiers, attenuators, front-end modules, filters and duplexers, and a plethora of other components. All three companies serve the mobile handset and base stations markets, broadband, and defense and energy applications. They utilize Gallium arsenide (GaAs) and Gallium Nitride (GaN) semiconductor technologies as base for their products. So the difference in valuation cannot be attributed to strategic matters.

Nor is the disparity explained by difference in company size. It is normal to expect small-cap corporations to have different valuation from that of the mid-caps and the large-caps that play in the same market. But as shown in the graph below, the revenue differences in this case are in percentage points rather than orders of magnitude. It also shows similar trends, so the outlook should be similar for all three companies.

Comparison of the net income of the three companies doesn’t provide an answer to the valuation dilemma either. On the contrary, the lowest valued company had the highest earnings last year. The graph below compares the earnings of the three companies for the last four years (many of the major losses are explained by companies loading their goodwill impairment onto 2008.)

 The picture becomes a little clearer when we consider operating cash flow per share rather than just revenues or net income. The chart below shows that despite Triquint’s seemingly superior performance in terms of net income, it has the smallest OCF/share, which explains its meager valuation.

But OCF/share poses more questions, the answers to which can be helpful in determining which companies are overvalued and which are bargains:

  1. All three companies have shown an upward trend in OCF/share, is that trend sustainable in the future?
  2. Triquint’s OCF/share is increasing at a higher rate than those of the two other companies. Can Triquint sustain that increase?
  3. Although RFMD’s OCF/share is higher this year than that of Skyworks, it receives lower valuation. It seems that the market is waiting to see consistent superior performance by RFMD before it raises the valuation. Will RFMD maintain its current performance?

We will attempt to answer the questions above in the next installment of this series.

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