Does Spreadtrum Get a Fair Price?

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Recently, Spreadtrum Communications (NASDAQ: SPRD) experienced a gain of more than 16% in one trading day to hit a price of $25.90 per share. The huge daily advance in its share price was due to the fact that the company received a $1.38 billion buyout offer from a unit of Tsinghua Holdings, the government-owned company. Is the offer fair for the company? Let’s take a closer look and find out.

Business focus in Hong Kong

Spreadtrum is a designer and developer of mobile chipset platforms for smartphones, offering a portfolio of diverse integrated baseband processor solutions to handset device manufacturers, Original Design Manufacturers, Independent Design Houses, and distributors. Spreadtrum is said to be the number one supplier to China’s TD-SCDMA market and the number two supplier to export markets. The company derived the majority of its revenue, $651.3 million, or nearly 90% of its revenue, from Hong Kong, while the nearly $70 million in sales were generated from Mainland China, excluding Hong Kong. The company had quite customer concentration in its operations. Spreadtrum has three big customers, which combined accounted for around 62.8% of its total revenue in 2012.

In the first quarter of 2013, Spreadtrum produced around $189 million in revenue, a 17.3% year-over-year growth compared to the first quarter last year. Its net income came in at $20.3 million, 16.5% lower than a net profit of $24.3 million in the first quarter 2012. The lower profit was mainly due to 39% growth in R&D expenses, from $28.4 million last year to $39.5 million. Going forward, Spreadtrum expected to produce around $220 - $228 million in revenue, a growth range of 16.4% to 20.6%. The company also estimated that in the second quarter, the gross margin would be a bit higher than the first quarter gross margin of 37.3%.

A reasonable valuation?

With an offering price of $28.50 per share, Tsinghua Holdings values the company at nearly 8.9 times its trailing EBITDA. Compared to its peers, including Infineon Technologies (NASDAQOTH: IFNNY.PK) and Texas Instruments (NASDAQ: TXN), Spreadtrum is the smallest company but not the cheapest among the three. Infineon Technologies is trading at $8.10 per share, with a total market cap of $8.7 billion. The market values Infineon at a lower valuation of 7 times its trailing EBITDA. In the second quarter of 2013, this German semiconductor and system solution company derived more than 54% of its total operating income from the Automotive segment, while the Power Management & Multimarket segment ranked second with €27 million in operating profit. In the next quarter, Infineon expected to generate around €1 billion in revenue with the estimated third quarter operating margin of around 10%.

Texas Instruments is the most expensive among the three companies--at $35 per share, it is worth around $38.8 billion on the market. The market values Texas Instruments at 10.6 times its trailing EBITDA. What makes investors excited about Texas Instruments is the increasing cash return to shareholders, via both share buybacks and dividends. In the first quarter, the company raised its dividends by 33% to $1.12 per share annualized. Moreover, the company also authorized an additional $5 billion to its stock buyback program. Texas Instruments reported that increase in both share buyback and dividends was due to its confidence in the sustainability of the Analog and Embedded Processing business model. Looking forward to the second quarter, Texas Instruments has adjusted its revenue guidance from the range of $2.93 - $3.17 billion to a range of $2.99 billion - $3.11 billion. The net income in the second quarter was estimated to come in at $0.39 to $0.43 per share.

Spreadtrum is the most profitable company of the trio, with the highest return on invested capital at 18.51%. Texas Instruments ranked second with a  return on invested capital at 10.75%. Infineon is the least profitable company, delivering the lowest return on invested capital at only 7.15%.

Texas Instruments might be a good pick

Spreadtrum seems to get a decent offering price with a reasonable valuation. For income investors, Texas Instruments might be their favorite due to its potential increase in near future share buybacks and dividends. At the current trading price, investors could get juicy dividend yield at 3.2%.

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Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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