***With the Russell 2000 trading near it's all
time high, now isn't the time to buy a small-cap index fund such as the
iShares Russell 2000 IWM. Rather, now is the
time to perform thorough and extensive research to find stocks that offer
attractive growth and trade at decent valuations and have been overlooked
by other investors and analysts.
I have several on my watch list that I will be
sharing with you over the next few weeks. Last week, I brought you DUSA
pharmaceuticals. Since writing the report the stock has jumped 11.4%.
Today I'll tell you about another undervalued small-cap gem that could
reward investors in the years to come.
The company is South Korean semiconductor products
maker Magnachip MX.
***According to the World
Semiconductor Trade Statistics, the global semiconductor market grew
ninety-six percent over the last ten years and is expected to continue to
grow at a compounded annual growth rate of eight percent.
The Asia Pacific region has seen the most rapid
growth over the past ten years and now accounts for more than fifty
percent of the global semiconductor market, compared to less than twenty
percent for the United States.
The growth in the semiconductor industry is thanks
to huge demand from emerging market countries. In addition, semiconductor
technology is now used in a wider range of electronic devices that we
have come to enjoy in our everyday life, including nearly every
electronic device.
Magnachip has a broad mix of interesting
technology for high volume consumer applications such as mobile phones,
flat panel displays, notebook computers and digital cameras to name a
few. Its customers include LG LG, Hitachi (HICTF.PK), Samsung
(KSE: 005930.KS), Nintendo PK and Nokia NOK and the
tech-behemoth Apple AAPL.
After emerging from bankruptcy protection in 2009,
Magnachip had its Initial Public Offering (IPO) in March. The company
exited bankruptcy with flying colors, and now has a pristine balance
sheet with much less debt. The company is also cash rich, with $194
million in cash on its balance sheet. For a company with a market
capitalization of just $562 million, having 35 percent of the company's
value in cash is quite significant.
Last year the company increased revenues by 38
percent to $779 million in 2010. It currently sells for seven times
earnings. However, net income did decrease by $765 million in 2010 due to
a one-time reorganization charge of $805 million. But the one-time charge
is now in the rear-view mirror, and was just a necessary evil in what is
otherwise an undervalued and growing company.
In its most recent quarterly report, Mangachip
reported a gross profit of $56.5 million compared to $49.4 million for
first quarter of 2010. This is impressive because the semiconductor
industry is highly cyclical and the first quarter is typically weak. It
also raised its outlook for 2011. Magnachip expects gross profit, as a
percent of revenue, to increase from 1.5 percent to 3.0 percent
quarter-over-quarter.
Magnachip is more than a turnaround story though.
There appears to be growth on the horizon for the company. This stems
from its deal with Apple AAPL and most recently, Atmel (Nasdaq:
ATML).
Magnachip provides the technology for Apple's iPad
and Atmel's touch screens. The iPad has been selling well in Asia and
should continue to do so going forward. Just like in the U.S., the
rollout in Asia drew hundreds of thousands of interested customers.
The iPad's continued success will have a direct impact on growing
revenues at a healthy rate.
Major investment banks, including Barclays,
Citigroup and Deutsche Bank are beginning to take notice of Magnachip's
growth potential. The average analyst estimate for the stock is $19,
which is about 30 percent higher than the recent share
price.
At the end of the day, Magnachip is growing
rapidly and undervalued. Some investors may have written off the stock
after its bankruptcy, but the restructuring and strong cash position of
nearly $200 million shows that this company is in good financial health,
and should continue to benefit from increased semiconductor use around
the world.
The company continues to demonstrate revenue and margin expansion since 2009 and has made the most of its recent technological innovations. And the deals with Apple and Atmel should only act as a base to further their customer relationships while becoming a leader in innovation. For investors, this stock could be a winner.
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
Comments
Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.