Would SLAB Make a Solid Foundation?

By William Trent, CFA of Stock Market Beat

We have written several articles about Silicon Laboratories (SLAB). Although we like the company and its technology, it has often been richly priced.  We have also written several articles disparaging the constant “who will be the next buyout candidate” festival that has overtaken semiconductor analysts desperate for reasons to get people to buy the stocks. Finally, however, we have found one we kinda-sorta buy into.
The Austin (TX) American-Statesman asks if whether a Chip maker shake-up is on the horizon?

Sales of chips for cell phones were expected to reach $33.1 billion in 2006, with much of that total going to companies that make flash memory used to store information in phones. Freescale concentrates on making other chips that control the phones’ operations.Analyst Brian Modoff with Deutsche Bank Securities says the numbers argue for a shakeup among wireless chip makers. He notes that the number of major cellular phone companies in North America has shrunk from six to four in the past few years, and the largest five cell phone makers now control more than 80 percent of the industry’s total sales.

In Austin, Freescale is viewed as a possible buyer of smaller chip companies, while the wireless segment of 10-year-old Silicon Laboratories Inc. is seen as a potential acquisition candidate, analysts say.

Despite the recent consolidation in the phone business, Modoff says there are 21 companies that make “baseband” chips — the math-intensive brain chips that control the basic functions of the phone — and another 17 that make “transceiver” chips that send and receive the radio signals that cell phones use to communicate.

That’s too many chip suppliers for a shrinking list of customers, Modoff says.

“Like the first episode of ‘American Idol’ every season, the industry is starting to have more contestants than prime-time slots available,” Modoff wrote in a recent report.

The article suggests that Silicon Labs is having trouble providing the support needed to convince customers to buy its AeroFone single-chip radio. However, long testing periods led Samsung, Silicon Labs’ largest customer, to only recently adopt its Aero Edge, which was introduced well over a year ago. So, while we don’t necessarily believe that is the catalyst for a potential sale of the company, we do agree that SLAB’s technology would make an attractive fit for a number of chipmakers, and given the ongoing industry consolidation we wouldn’t be at all surprised if it happened.

The author may hold a position in the securities discussed. The author’s current holdings are as follows: Long: Union Pacific (UNP) put options; Air Products (APD) put options; Nasdaq 100 (QQQQ) put options; FedEx (FDX) put options; Intuit (INTU) put options; Bookham (BKHM; Ballard Power (BLDP); Syntax Brillian (BRLC); CMGI (CMGI); Genentech (DNA); Ion Media Networks (ION); Three Five Systems (TFS); IShares Japan (EWJ); StreetTracks Gold (GLD); Starbucks (SBUX); U.S. Oil Fund (USO); Plantronics (PLT) call options; Short: Landstar (LSTR) put options; Ceradyne (CRDN) put options; Dell (DELL) put options; Plantronics (PLT) put options;

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