Actions Semiconductor (ACTS)
Actions Semiconductor is a Chinese fabless semiconductor company. Their main market is producing chips and platforms for mobile media players. No, not iPods, Jobs keeps all fab in house, but the plethora of systems flooding the Asian markets. They specialize in SoCs, or system on a chip. These integrate the functionality of an entire system on one chip. This vastly reduces the fab costs for devices since the circuit board complexity is greatly reduced, and as a result, offers improved reliability (fewer solder connections to go wrong, etc). They market other devices - for example, they just started shipping a GPS on a chip.
This is a competitive market, and it is pretty hard to identify a moat in this business, let alone predict sales rates, growth, future innovations, etc., all the things needed to determine what price you are willing to pay for the company. So, on to the “too hard pile” and on to the next stock.
Well, let’s just look at that balance sheet first. No debt, $3.05/share in cash equivalents, vs a stock price of $1.55 today. Yes, not only is it trading at 50% of cash, but 50% of enterprise value. In the trailing 12 months, their earnings were $0.54, a PE ratio of 2.9x. Net profit margin is 40%, and ROE is 17%.
On cash alone this is a screaming buy. What are the risks?
First risk is that this is in China. The rules can change at any time. We do not have the transparency into the cash - much of it is invested with major Chinese banks. Analysts probed this issue again and again in the most recent earnings call, and management assured everyone that the investments were equivalent (in safety and returns) to the US’ short term CDs.
Second risk, bad decisions by management. They seemed about to make a bad decision - they had announced plans to buy a touch screen manufacturer. No one really understood why - and they claimed that they could not name the business because they were partnering in the investment with others. They assured us the business would eventually be quite profitable, and that the business owners were investing their own capital. However risk is nothing more than uncertainty, and what could be more uncertain than an investment in an unnamed business not directly related to the core business of Actions? It seemed a questionable way to deploy cash, especially given the tight credit market and extremely low share price.
Management was repeatedly encouraged to buy back shares. The company acknowledged that was a great way to enhance shareholder value, but said they needed to grow the business long term. This makes some sense to me - looking at short term returns it is always great to see share buybacks at under 50 cents on the dollar, but it would also be nice if the business grew. That decision seems aligned with long term shareholder interests.
I must admit my interests are more short term on this one. The margin of safety is very large. We are actually being paid $134 to own a profitable semiconductor business - a company earning roughly $20MM EBIDTA.
Of course, like all semiconductor manufactures, they face a tough future. Earnings have been down, and are projected to fall further. Depending on your assumptions, the current share price could be normal (in this environment, not a typical market). However, I view the cash as a huge safety net. Yes, the company could turn unprofitable for a number of years, yes, they could fritter away the money in senseless acquisitions. However, they seem to recognize that danger, and are being conservative. It’s not hard to keep an eye on them and bail if they do anything outrageous.
If you are a Schloss type investor you would pick this up without a thought, as it is a perfect cigar butt purchase, and you would be insulated from significant losses with the other 100 equities you own. If you run a concentrated portfolio, you’ll definitely not want to take a huge position on this without more research than I have provided above. I think this company will have a decent to very good future. But if the stock was to appreciate to the point where they are giving the company away for free it’d still be a double for us.
Short term (a year or so) I wouldn’t be surprised if the shares went lower. If earnings do indeed go down, and the market is still depressed the price could drop quite a bit on the news. But, we are trading at 50% of cash. That cannot persist long term.
Tags: ACTS
August 28th, 2009 at 10:50 am
[...] wrote about Actions Semiconductor here. The story has changed somewhat since then, but in a good way. Better yet, although the stock price [...]