Semiconductor Sector Corporate Acquisitions: Interview with Stephens Inc. Best on the Street Analyst

Wall Street Transcript

67 WALL STREET, New York - October 1, 2012 - The Wall Street Transcript has just published its Semiconductors Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Semiconductor Capital Equipment - Cloud Computing - Mobile Device Consumer Demand - Enterprise Data Storage Demand - High Computing Power Technology - Semiconductor Inventory Burnoff

Companies include: RF Micro Devices Inc. (RFMD), Anadigics, Inc. (ANAD), Semtech Corp. (SMTC), Microsemi Corp. (MSCC), Intersil Corp. (ISIL), QLogic Corp. (QLGC), Emulex Corp. (ELX), Apple Inc. (AAPL), Alcatel-Lucent (ALU), CIENA Corp. (CIEN), OmniVision Technologies Inc. (OVTI), Microchip Technology Inc. (MCHP) and many others.

In the following excerpt from the Semiconductors Report, an expert analyst discusses the outlook for the sector for investors:

TWST: Would you begin with a brief introduction to your coverage of the semiconductor sector, including some of the specific names you follow?

Mr. Kumar: I am Harsh Kumar from Stephens, and I was previously at Morgan Keegan for 12-something years. I've been doing sell side for about 15 years, and our primary area of coverage is small and midcap analog and communication names. Having said that, we also have a couple of unique stocks that, for example, deal with LEDs, and also power amplifiers within cell phones.

It's about a handful of stocks, about 12 stocks total at this point in time, and those would be RF Micro Devices (RFMD) and Anadigics (ANAD). In the analog space there are companies like Semtech (SMTC), Microsemi (MSCC) and Intersil (ISIL). So altogether, having said that, about 12 stocks; and the other unique area we cover is the storage area network stocks, so QLogic (QLGC) and Emulex (ELX), but altogether about 12 stocks.

TWST: In which customer end markets are you observing the most robust demand, and which of your semiconductor companies has the most exposure to those end markets?

Mr. Kumar: At this point in time, we're in a pretty precarious period of the cycle given what's happening with the macroeconomy. We haven't really seen a cycle as such now for a couple of years. So we've had a lopsided cycle where we have had first half that is better than second half. This year, actually, is turning out to be somewhat OK, but muted. So we've had a little bit of growth in the first half, and we're going to have a little bit better growth, I think, in the second half.

So the two cycles that are working out very well for people right now are the Apple (AAPL) cycle or the Apple products play cycle; and then, you kind of have to play the mini cycles. You basically have to find, yes, small little upgrade cycles that are happening. For example, there is an optical upgrade cycle that is happening in China, at this point, about to start, and possibly then continuing into the U.S.

There is also a 4G wireless upgrade cycle that is happening in the U.S., and one of the best, most exposed stocks that we have to the optical side is Semtech. This is a company that makes SerDes products for the 40- and 100-gig long-haul markets. They are the only ones in the market that deal with this product. And so you pretty much have a choice. You either develop the products on your own, or you go to Semtech and buy it. And so the big customers are Huawei, ZTE (0763.HK), Alcatel-Lucent (ALU), CIENA (CIEN) is another one.

The other is in the Apple play we have, a stock called OmniVision (OVTI), which makes camera sensors for a lot of people, but primarily for Apple. We estimate that Apple is as much as 35% of revenues. And they, in fact, guided last week an upside to revenue estimate by 100-something million dollars. And that tells me flat out that the Apple play is on.

In terms of other areas or other ways of play, there is a little bit of M&A activity that is going on in our space, and we're positive on companies that are buying other companies and increasing their earnings with that move. For example, Microchip (MCHP) and Semtech both have recently have made acquisitions that are substantial and both should see pretty good uptick in their earnings momentum because of that.

TWST: What factors drive the volatility in the semiconductor sector, and what is the outlook for each of those factors over the next six to 12 months?

For more from this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers, and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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