Niche Chip Maker Ready to Rebound

04/22/2008 12:00 am EST

Focus: STOCKS

John Buckingham

Editor, The Prudent Speculator

John Buckingham of the Prudent Speculator says communications-chip maker Exar is ready to resume innovation and healthy profitability.

Exar (Nasdaq: EXAR) designs chips for the highly competitive serial commu­nications, networking and transmission, and storage markets. Customers include Hewlett-Packard, Tellabs, and Nokia.

In its Interface unit, Exar focuses on Universal Asynchronous Receiver Transmitter (UART)— technologies used to convert parallel data series into serial ones to alleviate the restrictive cabling requirements of parallel communications.

Exar also develops and sells high-speed analog, digital and mixed-signal (both analog and digital) physical interface and ac­cess control chips in its Communications division. The physical interface includes a transceiver (transmitter and receiver, com­bined), and is the direct connection to the transmission media, which is generally fiber and copper cabling. In Power Management, launched later in 2007, Exar sells technologies designed to regulate power delivered to a system.

In the nine months ended December 2007, Interface sales com­prised 57% of the total, followed by Communications at 24%, and Power Management at 19%.

Since [last year], the company has experienced a host of monumental shifts. The company announced its intention to merge with peer Sipex to increase scale in existing mar­kets and broaden access to the networking, industrial, and high-end consumer markets.

Management had high hopes for the combination, expecta­tions that have yet to pan out. In fact, management didn’t even pan out. In December, chief executive officer and president Ralph Schmitt, who had been CEO at Sipex, re­signed.

The company remains in a leaderless transition, while [it is working through] ac­counting issues related to the deal. Meanwhile, weaker-than-expected sales of power-management products in the December quarter and a wafer-production snafu in China crimped December-quarter financials.

Not the most excitingly positive take, but none too unfamiliar among smaller-cap technology names. Exar hasn’t yet emerged from the woods, but the trees seem to be getting thinner. And the recent announcement of an industry-first wireless UART solution suggests the company didn’t stop innovating along the way.

There are lots of reasons to remain optimistic about a turnaround, starting with the still very well-funded balance sheet. Exar currently maintains about $280 million in cash, or about $5.95 per share, rep­resenting 75% of the current share price. And revenue comparisons should ease with the dénouement of the accounting transition, barring an end-market-related slowdown [that pulls] the price-to-sales ratio below one time.

At the same time, further progress in the Sipex integration and a focus on bringing operating margins to the long-term goal of 20% should pull up the bottom line, which the Street expects to re­emerge from the red in the current quarter.

We currently believe EXAR shares are worth $15. (The stock closed above $8 Monday—Editor.)

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