Silicon Motion Technology [Part 1]: Sifting Through The Mud

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Silicon Motion Technology Corp. (ADR) (NASDAQ:SIMO) is a global leader in the development and production of NAND flash storage devices and specialty RF ICs for mobile devices, which are used by some of the leading smartphone manufactures. Additionally, the company is increasingly focused on SSD controllers for notebook PCs as well as memory card and flash USB drive controllers. What’s more, Silicon Motion is a dedicated provider of 4G LTE transceivers for Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930)’s smartphones and tables.

Silicon Motion’s market capitalization

Many tech hardware companies rely on Silicon Motion Technology Corp. (ADR) (NASDAQ:SIMO)’s products including Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930), SanDisk Corporation (NASDAQ:SNDK), Toshiba Corp (OTCMKTS:TOSYY) (TYO:6502) and Intel Corporation (NASDAQ:INTC). At present, Silicon Motion has a market capitalization of just under $440 million and an average daily volume of 276k. Silicon Motion is headquartered in Taiwan and is listed as an ADR within the United States. I should also mention that data on Silicon Motion is somewhat muddled as valuations and market capitalization figures tend to differ depending on where you look. However, using figures supplied by the company I have endeavored to use the correct figures within this piece.

Despite Silicon Motion Technology Corp. (ADR) (NASDAQ:SIMO)’s impressive array of customers, investors do not seem to have much enthusiasm about the company’s prospects. Indeed, according to 2012 figures, Silicon Motion is currently trading at a historic P/E of 10.1, low for the diversified electronics sector, where the average P/E is currently around 20. That being said, it would appear that on a forward basis, Silicon Motion is struggling. In particular, Silicon Motion is expected to report full-year earnings per share of $0.97 for 2013, which indicates that the company is currently trading at a forward P/E of 14.6; more in line with the sector average.

Silicon Motion’s financial data

Nevertheless, Silicon Motion Technology Corp. (ADR) (NASDAQ:SIMO)’s balance sheet changes the picture somewhat. At the end of the third quarter, Silicon Motion had $160 million in cash, around $5.20 per share. The company had no debt for this period or significant amount of liabilities. Strip cash out of the company’s valuation and you get a historic P/E of 6.4 and a forward P/E of 9.3, two figures that make the company look highly appealing on a valuation basis.

Still, Silicon Motion Technology Corp. (ADR) (NASDAQ:SIMO)’s outlook is not pretty. Indeed, the company has already missed consensus analysts estimates for revenue guidance for the third and fourth quarters during 2013. In addition, the company’s margins and net income figures are both down year-on-year, no matter what comparable quarter you use from 2012. For example, Silicon Motion’s third quarter net income was down 39% year-on-year, revenue had declined 26% and the company’s operating margin had decline 2%, from 22% to 20%.

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