Our recent data indicates the Q and outlook will have the following qualitative factors:
- An obvious lack of upside in defense/military excluding the incremental Phonon revenue ($4-8m). We expect management to avoid speaking about the defense end-market if they can. The outlook for the segment is better than in previous years but nothing like the hot-rod-bod they had told investors it would become for 2018.
- Continued strength in enterprise HDD product driving upside in the data center business.
- Surprising improvement in the more recently lackluster communications portfolio, potentially more important for guidance than for results – this will make it really tough to gauge true Dec-Q guidance versus M&A guidance plus Vectron, as the deal may close before the end of the Q (according to management of KN).
Net: we reiterate our view that MSCC will have a slight revenue miss on the Sep-Q but will guide above for the Dec-Q, and management will argue that net revenue is above expectations for the combined two quarters.
Microsemi’s business model is to lever up, acquire, strip opex, and harvest the cash flow. There is nothing wrong with this business model, except that MSCC has bought a collection of the walking dead of semis that do not grow and – based on our work – the portfolio deteriorates and declines over time which necessitates the next deal. Management knows this, and Microsemi employees know this as well. But management tries to pretend – to investors only – that MSCC is a growth company in order to grab a bigger multiple, which sets up the next eventual fail when the M&A math of 1+1 does not = 2, or the organic revenue does not match guided results.
Hey Ami, you might say, your chart up there shows they are going to grow organically this Q. So, how about that?
A 1-2 quarter move says nothing about the underlying collection of assets. We are, after all, in the strongest semi cycle ever since 1999, so the fact that MSCC can deliver one quarter of +7% organic y/y growth doesn’t invalidate our (exhaustive) work and the outlook of the overall portfolio. And, don’t forget that just ~150 days ago MSCC quietly closed an acquisition to help them make the Q and the outlook.
On our math the stock is trading at ~21x EV to fwd FCF, which places us below Street on forward FCF. With yet another acquisition right ahead, no one will remember that with all the moving parts, FCF was revised seriously down for organic reasons. That will give us a chance to Short this thing again. What are we saying? We will be back on the short side with this one again at some point in early 2018.
