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For years, satirical late-night-TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. congressional districts and its representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.
What PLX Technology does
PLX Technology manufactures PCI Express -- or PCIe, USB, and I/O interconnect devices that are used in consumer microprocessor units and usually small-scale servers and storage. The company's primary selling focus is its PCIe's, which are used on motherboard mainframes and allow data transfers back and forth between servers and storage centers for enterprise customers, and between programmable logic devices in personal computers.
In PLX's latest quarter results, released in late July, the company reported a 15% decline in year-over-year revenue and a $0.07 adjusted loss. According to management, PLX's PCI products delivered both record revenue growth and design wins; however, its Ethernet business struggled mightily.
Whom it competes against
Now, here's where things get both tricky and interesting. In terms of competition, PLX finds itself up against both an arsenal of peers, as well as an industrywide slowdown in computer product sales.
PC unit sales are expected to dip for the first time in 11 years this year, and enterprise customers have been predominantly holding off on making large purchases and expanding their data centers until after the election. That's translated into bad news for PLX, which has been steadily losing money – yet some of its peers have had it even worse. OCZ Technology (Nasdaq: OCZ ) , a maker of solid-state drives and other mainframe components, recently lowered its earnings outlook and cautioned that accounting irregularities would hinder its ability to report earnings any time soon.
In terms of competitors, PLX is staring up at a laundry list of companies with deeper pockets and more diverse product lines that translate into fairly steady profitability. Both Cypress Semiconductor (Nasdaq: CY ) and Xilinx (Nasdaq: XLNX ) manufacture programmable logic devices and various forms of mainframe products, and both are decidedly profitable and paying a dividend. It's difficult to gain market share with these two names in the mix.
But the one "interesting" factoid I failed to mention yet is Integrated Device Technology's (Nasdaq: IDTI ) offer to buy PLX nearly six months ago. The offer, which is for $3.50 in cash and 0.525 shares of IDTI stock, has been agreed on by both companies, but has dragged on for an incrediblly long time following PLX's inability to shop itself around and find a better bid. PLX plans to divest its Ethernet business because of the buyout and focus solely on PCIe.
After carefully reviewing PLX Technology and its peers, I've decided to go against the grain and make a CAPScall of outperform on the company.
The fundamentals tend to not support my bullish stance on PLX. It hasn't been profitable on an annual basis since 2007, and PC sales and enterprise spending are clearly not in its favor at the moment. However, IDT and PLX's largest shareholders have made it very clear that they're committed to seeing this merger go through. With IDT offering $3.50 a share in cash, and IDT's share price closing at $5.58 on Friday, this deal should be worth $6.43 per share, yet PLX closed at a mere $3.99 on Friday. This represents an amazing 61% arbitrage opportunity assuming IDT's stock doesn't head lower.
For IDT, PLX's products should complement its already existing PCIe business and should position the company well for a rebound in the PC and wholesale business. PLX clearly isn't my typical outperform recommendation, but its current valuation given the existing IDT buyout makes sense.
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