Computer manufacturers are being hit by poor back-to-school sales, and competition from low-cost machines, such as ‘netbooks’ and powerful new mobile devices. No wonder Intel, which supplies microprocessors for four out of every five PCs, has just splashed out $1.4bn on Infineon’s wireless chip operations in an attempt to enter the booming smartphone sector. Next on Intel’s shopping list could be CSR, the Cambridge-based group that designs microchips for internet access (wi-fi), global positioning systems (GPS), and bluetooth applications.
CSR would immediately provide the necessary scale to compete in this cut-throat industry, dominated by Qualcomm and Texas Instruments. Its technologies could also be used as a launch-pad from which to sell other products to the likes of Nokia, LG, RIM and Samsung. The shares would be a snip to most trade buyers since the stock has been artificially depressed due to its ongoing patent infringement spat with rival Broadcom.
The firm is also in the process of developing a series of new designs, having spent $155m on research and development in 2009 (or 26% of turnover). It enjoys significant growth opportunities in emerging markets, notably in China where it continues to be a leading player in Bluetooth and smartphones. Its clever technology is increasingly being built into cars and many electronic goods, including gaming devices, headsets and digital cameras. The stock should be further boosted by the implementation of 4G mobile networks.
CSR (LSE: CSR), rated a BUY by Panmure Gordon
The City predicts 2010 revenues and underlying earnings per share (EPS) of £570m and 28.0p respectively, rising to £600m and 35.6p in 2011. That puts the stock on an average enterprise value to earnings before interest, tax, depreciation and amortisation (EV/Ebitda) ratio of only 3.6 – about half the sector average. I would value the group on a six-times multiple. After adding back the $425m cash pile and factoring in, say, $30m of costs relating to the Broadcom litigation, I get a fair value of 390p per share.
But what are the risks? There has been a recent shortage of foundry capacity across the industry. That’s preventing CSR from meeting customer demand. It could trim quarter-three sales by $10m (or 4%), but the problem should be resolved over the next six months. Other generic risks include another bout of destocking triggered by a double-dip, technological obsolescence and tough competition.
CSR looks like a tasty acquisition for the likes of Intel. Panmure has a 500p target price.
Recommendation: BUY at 309p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments