In the quest for ever-faster data transmission and storage, many companies are working to developer advanced products and components to serve the demands of businesses and consumers, explains Doug Gerlach, editor of Small Cap Informer.
One small business in this market appears to have the double-whammy of a positive business outlook — both long- and short term — and an attractive current valuation.
Silicom Ltd. (SILC) is provider of high-performance networking & data infrastructure solutions for cloud and data center environments. Silicom is well positioned to benefit from the growth of multiple “hot” end markets: cloud, data centers, Web 2.0, cyber security, SD-WAN, NFV and storage.
Silicom works hand-in-hand with customers to design cost-effective solutions that integrate the company’s products into customer systems. Over the long-term, this increases sales per system and sales per customer.
Since 2008, Silicom has grown revenues at a very consistent annual average pace of 22.0%, reaching $125.7 million in 2017. EPS have grown 20.0% during the same period. In the fourth quarter ended December 31, 2017, the company saw revenues grow 33.4% and adjusted EPS grew 46.6%.
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In the fourth quarter, the company announced a record design win from a scaled-out cloud customer with potential for revenues of $75M per year once full deployment run-rate is achieved, which is expected in 2019. Considering that 2017 revenues were $125.7 million, this is a significant game changer.
We are projecting 15.0% future revenues and EPS growth for SILC over the next five years. This is in line with analysts’ long-term estimates, though we expect a bit higher growth in the next two years which could set the stage for future results at a higher pace. ROE has been trending upwards and ended 2017 at 18.1%. The company has no debt, and had $30.7 million in cash at the end of the 2017 fiscal year.
Based on EPS of $5.75 in five years, and a high P/E ratio of 26, SILC could reach $149. This P/E is at the high end of its five-year range, but below the highest P/E of the last two months of 32. On the downside, a low P/E ratio of 12.1 times last year’s EPS of $2.86 delivers a future low price of $34. From the recent price of $69, the upside/downside ratio is 3.1 to 1, with a potential total annual return of 20.7%.
