Tiny Catalyst Semiconductor
Catalyst designs, develops, and markets a broad line of products: reprogrammable non-volatile memory chips, and analog/mixed-signal chips. Over the past two years, the company has focused its research and development efforts on high-margin, high-growth analog/mixed-signal products (cell phones and other consumer electronics). That investment is starting to pay off, and the company stands to build a substantial competitive moat, provided that its patent on the technology is approved and the aforementioned products generate mass appeal (as management believes they will).
These new products have risen from 2.9% of total sales in the fourth quarter a year ago to 5.5% in the latest quarter on $16.3 million in sales -- all the while competing with deep-pocket names like Texas Instruments
Motivating the R&D investment was the company's decision not to chase the highly competitive flash memory market to higher densities. Low-density flash, where the company competes with Silicon Storage Technology
The fate of Catalyst today lies in electronic, erasable, and programmable read-only memory (EEPROM), which makes up the better part of sales (88% during the last period for which annual data is available). The market itself is characterized by high unit volumes sold at relatively low unit prices. The company effectively competes with Atmel
The big news when Catalyst announced fourth-quarter and full-year results, after the market closed last night, was that it has been profitable for seven consecutive years and for 14 consecutive quarters. The company's business model is less capital-intensive than traditional semiconductor companies, because it outsources manufacturing, assembly, and most testing of its products to third parties.
All those profitable years have produced one very ugly stock chart. Good years, like the fiscal year ending April 2004, produced full diluted net income of $0.48 a share. This year, the company earned $0.20 a share! Fourth-quarter net income fell from $0.29 in the comparable quarter last year to $0.03 this quarter.
The company is now saying that soft second- and third-quarter sales have been followed by a nice recovery in its businesses -- including flash. So the outlook is looking better for the coming year.
The only analyst making an estimate for next year expects annual earnings to fall further -- to $0.12 a share, or 36.9 times forward earnings. The stock, on that basis, is not cheap.
Consider this: Catalyst is debt-free and has ample cash for its immediate needs -- and the company recently finished buying back 3.5 million of its own shares at an average price of $3.91 per share. Business is firming, and the new product line, with other offerings in the wings, is both high-margin and high-growth.
Catalyst is at an inflection point. Investors looking for an interesting company to catalyze their tech portfolio -- one that has solid financial footing -- may want to take a look. But, as usual, you will want to do your own due diligence.
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