Monday, April 28, 2008

The Microchip Model

At the Xilinx analyst conference the other day [see my Xilinx analyst conference summary] one of the analysts asked if Xilinx would consider imitating "the Microchip model" and paying out higher dividends.

How the worm has turned.

Today Microchip reported on its Q1 2008 results and held its own conference [See my Microchip (MCHP) analyst conference summary]. The results were pretty good. Anyone who has followed Microchip this last year would have been worried that Q1 could be another quarter of declining revenues. Instead revenues were up sequentially 3% and up 1% from year earlier, to $260.4 million. Non-GAAP earnings per share hit a record.

The Microchip model (which in addition to knowing and having used their products attracted me to their stock) includes paying out dividends. For years Microchip management resisted doing share buy backs and instead kept increasing the dividend, at least in good times. And how Wall Street seemed to hate that. Every analyst conference included suggestions to take some (or most) of Microchip's cash and buy back stock.

What is great about Microchip, aside from their microcontroller products, is that management cares about long term investors. Such investors aren't going to sell their stock during a share buy back, nor do any short term gains from this game help them. Dividends mean revenue. You can do what you want with your dividends. Sure, you have to pay taxes on the dividends you receive, but you don't have to sell stock (and pay capital gains taxes) to get a stream of money. As far as I know, Microchip had (and has) the highest dividend payout in the semiconductor industry, where many companies pay little or no dividend.

This change of sentiment towards higher dividends may not last. Oddly, last fall the board of Microchip finally relented and set up a share buy back. They borrowed money to do it, too; I don't like that. But they are so profitable that are likely to be able to both continue to increase dividends and to pay down the debt (which is in the form of convertible debentures).

Best part of the conference? They raised the dividend yet again, to 33 cents per share per quarter.

In case it has not been perfectly clear, I own Microchip stock.

Keep diversified!

Monday, April 21, 2008

Altera Q1 Shows PLD Sector Strength

Altera (ALTR) reported Q1 results on April 16th, at which time I was recovering from my recent Microsoft project. I listened to the analyst conference recording today. If you like you can read my summary of the conference.

Revenues were up 4% over Q4 and 10% over Q1 2007. While that is not hockey stick growth, it is respectable when many semiconductor companies are reporting numbers that are down to flat from a year ago. What is Altera's competitive advantage?

Altera make PLDs, programmable logic devices. Essentially a PLD is a piece of silicon with a bunch of logic gates arrayed on it. Need some new cell phone logic? You use software to design what you want, then program the PLD. Stick the programmed chip on the board with the other chips and you are ready to run, or at least debug. So you can use this process for prototypes or small runs. For larger, stable runs usually manufacturers go with the well known process of making an IC that has the logic in the physical design, an application-specific IC or ASIC.

There are common sorts of PLDs, and Altera makes both. FPGA are fully programmable gate arrays. CPLDs are Complex PLDs. Increasingly other functions besides logic are available on these chips, notably analog communications functions.

According to Altera, the PLD market is growing faster than the chip market in general as ASICs are increasingly replaced by programmable devices.

Rival Xilinx will be reporting its Q1 on April 23. My summary of that conference will be here, in case you want to bookmark it. Of course several other companies are in the PLD business as well. Altera is moving to a 40nm process this year, and yes, that is a smaller transistor size than Intel is using at present. Xilinx will doubtless tell us why theirs is the product of choice when it reports.

Altera is looking at continuing growth based on customer feedback, a book-to-bill ratio over 1, and a strong backlog of orders to fill.

I don't own the stock and am not about to run out and buy it. Strangely, this is because Altera is too well managed. They have generated a lot of cash and have been buying back their stock throughout the current liquidity squeeze. I would not call the stock overpriced, and it is relatively safe for a technology stock. But there are a number of technology companies that are growing as fast or faster that have lower price-to-earnings ratios at this time. If Altera stock got caught in a market downdraft, however, I might add it to my buy list.

More data:
my main Altera page

Friday, April 18, 2008

Bottom Fishing Time?

Fans may have noted my absense from Dissecting the Bull for multiple weeks. I was doing a project for Microsoft. I turned it in Monday night. I was so far behind on rest and other requirements that I have not had time to write until now. I did go to a local poetry reading last night and read a poem:

Touching the old skills
Fingering them like tools
The Mind sends forth tendrils
Frosty and interwoven

Which I wrote an amazingly long time ago. But the question for many investors, that I continue to ponder as well, is: time for bottomfishing? That is an old skill, for sure.

In a normal week I would be writing blogs on AMD and Gilead's analyst conferences, but that would take more energy than I have this morning.

When the tide goes out ... around here lots of people go looking for abalone. I have always considered abolone too beautiful and too rare to grace my barbeque. While taking them should be banned until they become plentiful again, at least Fish and Game has cut back to 4 the number a person can take in one day.

Taking stocks off the bottom is limited only by your available cash and credit. The problem is knowing when there is a bottom. While many signs and portents are visible in the world now - famines and melting glaciers and three-headed snakes - let's look at something we are better at interpreting, the housing market, mortgage crisis, and overall U.S. economy.

The thing about downward spirals is that there are usually two options. One is that the downward action impells more downward action. The other is that balancing forces come into play, breaking the cycle, and perhaps even causing an upward cycle to resume.

I think the bulls and bears both have it right. The bears say that housing prices are continuing to fall, which will continue to make houses worth less than the mortgages on them, which will hurt consumer spending, anyone involved in the banking and mortgage industries, and hence rippling out to the general economy. And the slowing general economy will feed back into the spiral. So bears believe it is not time to buy stocks, in fact if you have not been smart enought to sell off your entire portfolio, you should do so now.

The bulls say that we have passed through a liquidity crisis. The Federal Reserve may have screwed up in the past by allowing the housing bubble to form, but now it has created enough liquidity to restore confidence and allow growth to resume. There is a lot of new and used housing out on the market right now, but housing starts are now below the real level of increasing demand. Because immigrants are still immigrating, young adults are still having children, and increasing population requires increasing housing. Are people being turned down for loans in large numbers? Well, that shows there is pent up demand.

So the overstock of housing on the market will dwindle, then it will drindle rapidly (varying in rate by locality). One man's foreclosure is another man's windfall. Then the new home builders will start upping their building permit applications. Then workers will be hired and demand for cement and lumber will return. The stock market will go up, and people will wish they had bought while it was down. Given that the rest of the economy is pretty sound, so far, that means GNP will start growing again, aggregate consumer spending will go up, and we can start worrying about famines and three-headed snakes instead of the economy.

Of course, you should hedge your bets. The bears might be crowing for a few more months. Then again they might be underestimating the American spirit. I know a lot of people who have tightened their belts in the past 2 years. And the payoff has already begun. With less debt, they have less interest to pay, and more real disposable income.

We won't know when the corner has turned. The statisticians will let us know three months later.

There are no tide tables for the economy. But if you want abalone, you have to go to the tide pools while the tide is out. When the tide comes in, the picnic is over.