All Aboard at Atmel

Wall Street's buyback binge continues. Earlier in this earnings season, we brought you news of buyback programs at tech firms such as Symantec (NASDAQ:SYMC) and Analog Devices (NYSE:ADI). This week, the sector continues to invest in itself as semiconductor maker Atmel (NASDAQ:ATML) joins in the fun.

On Monday, Atmel announced a major push to reduce a share count that, by tech standards, really hasn't been growing that fast. Over the past five years, Atmel has only diluted itself by about 1% per year. If it continues diluting at this pace, the company's plan to spend $250 million buying back shares should have the effect of keeping share count static for a full decade. That's right, folks -- Atmel aims to buy back as much as 10% of its shares outstanding. What's more, it seems intent on moving quickly, and has already concluded an "accelerated stock repurchase confirmation" with investment bankers Morgan Stanley and Credit Suisse to help move things along. But can Atmel even afford such a large-scale buyback? And perhaps more importantly, should it? That's what we're here to find out.

Can it pay?
Financing the buyback should be a snap for the cash-rich Atmel. The company sports the proverbial "rock-solid" balance sheet, with $350 million more cash than debt on its books. Thus, the firm could easily cover the tab with cash on hand.

Not that it needs to. With trailing free cash flow of nearly $95 million, Atmel could just as easily finance the entire buyback out of its own copious cash profits, and wrap up the repurchase in just a little more than two and a half years. With no deadline announced for completion of the latest repurchase program, this would seem a viable option for Atmel. One wonders, therefore, if there's a reason for its apparent rush to get the deal done by "accelerating" the repurchases with its bankers' assistance.

Should it pay?
One reason Atmel might want to get this over with quickly can be found in the performance of its stock over the past year. The fact that it's lagged the S&P 500 by about 20 points may suggest to management that Atmel's stock is undervalued. But is that really the case?

It's hard to look at these numbers and call Atmel "undervalued." True, the firm is profitable in an industry where many of its rivals are losing money. However, Atmel sports a P/E nearly four times as large as also-profitable Texas Instruments. And Atmel's price-to-free cash flow ratio, while a more modest 28, still sits higher than TI's 26, higher than STMicro's 16, and much higher than the average S&P 500 firm's 18.

Personally, I would find these numbers hard to stomach, but for one thing -- Atmel is in a cyclical industry, where the common wisdom about pricing gets turned upside down. With cyclicals, you're supposedly best advised to buy when a price looks insanely high, and sell when prices look too good to be true. The logic goes like this: High valuations typically arrive at the bottom of an industry cycle, just before things are about to improve. Conversely, low valuations often indicate a cyclical "top," just before the industry tanks.

So my misgivings over the valuation notwithstanding, what we could be looking at here is Atmel's management foreseeing a turnaround in its business, and buying before the rest of the market wakes up to this potential. Considering the triple-digit percentage improvements in both sales and profits that analysts are positing for Atmel next year, management just might be proven right.

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Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy.