SLAB: Silicon Labs is Running Out of Options

By William Trent, CFA of Stock Market Beat

According to today’s press release:

Silicon Laboratories Inc. (SLAB), a leader in high-performance, analog-intensive, mixed-signal integrated circuits (ICs), today announced a definitive agreement with NXP, formerly Philips Semiconductor. NXP will purchase the Aero transceiver, AeroFONE(TM) single-chip phone and power amplifier product lines, for $285 million in cash, with additional earn-out potential of up to an aggregate of $65 million over the next three years.

Based on that purchase price, NXP is paying between 22% and 27% of SLAB’s enterprise value to acquire businesses that accounted for 33% of revenue and 20% of operating income (according to a guesstimate given on the conference call) in the fourth quarter. However, other guidance given on the call suggests the wireless business may have provided the bulk of operating income:

There will likely be a hefty tax on the proceeds, so after the deal is completed we would expect Silicon Labs to have about $600 million of cash and marketable securities and no debt underlying their $1.7 billion market cap, for a remaining enterprise value of $1.1 billion. Assuming all goes according to the company’s plan they will achieve their 25% operating margin goal beginning next year, which would make that valuation appear relatively cheap.

The problem is, things seldom go according to plan. And much of Silicon Labs’ premium valuation was justified by the options the company had:

1. Selling the whole company. The company could still sell the remaining portion, but the valuation they got for wireless (presumably based on a trough level of revenue and earnings) it is hard to see anyone paying a significant premium for the remainder.
2. A recovery in the wireless segment. Silicon Labs defied all odds to take a good chunk of market share with its GSM transceiver. The possibility that they could pull another rabbit out of the hat was surely worth something. Now the value is locked in, and apparently at a relatively modest level.

With these options now essentially off the radar, we are left with a company trading at something like 100x trailing operating earnings for the continuing businesses. While we’ll root for SLAB to achieve their plan, we probably won’t be buying the stock.

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; 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: Starbucks (SBUX) call options; Landstar (LSTR) put options; Plantronics (PLT) put options

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