Microcontroller Producers to Bounce Back?

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Microcontrollers (MCUs), over the years, have generally withstood semiconductor market cyclicality better than standard chip products. This has likely been because of the large and growing number of applications for those devices that combine computer system components on a single unit. In 2012, sales have retreated somewhat, due to soft conditions in end markets such as industrial and consumer-related sectors. Over the long haul, the product category should sustain an upward trend. A review of several of the key manufacturers’ stocks could well entice some in light of their sunken levels.

Microchip Technology (NASDAQ: MCHP)

The market leader seized the opportunity to acquire Standard Microsystems and further grow its share, completing the buyout in early August. It paid $920 million for SMSC, a mixed-signal semi focused on connectivity solutions that serves the auto, consumer, and PC markets. MCHP touts the purchase as a means of extending its offerings and penetrating new sectors.

Microchip is feeling the effects of the demand slowdown through lower organic sales and gross margin weakness. Operating at significantly less than full capacity, as well as selling a less profitable product mix, are the main causes. Even so, its product margins remain above 50%. In addition to MCUs, it makes Analog and Interface products (the unit where SMSC resides); about 80% of these offerings are proprietary, providing stability to pricing over time. Microchip’s other units are Memory Products, including Serial EEPROM and Flash memory chips, and Technology Licensing. Of note, memory sales have fallen sharply of late, down 18% in the latest period.

MCHP shares have turnaround potential for the industry-specific reasons stated above. Unusual for a semiconductor stock, they offer a well above-average dividend yield of about 4.4%, too.

Atmel (NASDAQ: ATML)

Atmel’s forte is touchscreen controllers, a product line that has been experiencing sluggish sales this year, contributing to a steep decline in core Microcontroller sales. The company’s QTouch and/or maXTouch products are incorporated in many of the top-selling smartphones and tablets, such as those made by Samsung and Amazon. This is a market that is apt to revive as new models are introduced. Furthermore, it was recently chosen by Microsoft for its Surface tablet.

Gross margins are lower than with MCHP, at around 43% currently. Over the past couple of years, it has put MCUs, including touchscreen devices, at the forefront of its offerings. Meantime, it also operates Nonvolatile Memories, Radio Frequency and Automotive, and Application Specific Integrated Circuit (ASIC) segments. Favorably, year-over-year sales decreases should be less severe in the fourth quarter and margins should start to edge back up, allowing for a slow earnings upturn possibly. The company should be well positioned for an upturn in demand that would support capacity utilization and pricing.

ATML stock has been trading at just over $6, well below its 52-week high. It is prone to be much more volatile than MCHP, adding to its upside for risk-tolerant investors. With brighter skies likely on the horizon, shareholders may well be rewarded.

Freescale Semiconductor (NYSE: FSL)

FSL’s bottom line is pressured by sizable interest costs to cover its $6.5 billion in long-term borrowings. It may, in fact, post net losses in the near term. In terms of operations, though, it is similar to Atmel without the touch business. Its microcontrollers are predominantly utilized by the automotive and industrial markets. Products include engine management systems and consumer appliance control systems. Elsewhere, it also serves the Networking and Multimedia sectors, as well as operating a cellular product business. Sales to all end markets have been descending. Gross margins were 42% in the latest quarter; still elevated despite a lower proportion of MCUs than the previous firms.

The automotive market is attributable for a substantial, 40% or so, proportion of revenues, and auto industry strength is thus key. FSL shares are too risky for most, given the high debt and negative equity. Those willing to bear the risks could see nice returns if the environment is positive.

Summary

The microcontroller business is one that should realize revitalization, be it next year or further down the road. Falling stock prices may have created buying opportunities for those with some tolerance for volatility.


dctotal has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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