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Micrel, Inc: Working For Shareholders
Posted by: Frank Voisin (IP Logged)
Date: January 20, 2012 08:56AM
Micrel, Incorporated (MCRL) designs, develops, manufactures and markets a range of approximately 3,000 analog integrated circuits used in cell phones, laptops, tablets, networking devices, televisions and other equipment. The company produces power management analog products, high bandwidth communications circuits and Ethernet products. It is important to recognize that the company produces analog circuits, rather than digital. Digital circuits are more commoditized, whereas analog circuits are dependent on individual design teams, have longer product cycles and more stable pricing, providing the company relatively greater stability (as we’ll see soon).
At the time of writing, the company trades for a market cap of approximately $650 million, of which a whopping 22%, or $143 million, is cash. The company has zero debt as of its most recent quarter. Over the last five years, the company has generated on average $44 million of free cash flow (less than the $51 million TTM figure). This works out to an ex-cash free cash flow yield of 8.7%. Though this isn’t spectacular, nearly all of this has been returned to shareholders over the last five years through dividends and share repurchases.
Let’s take a look at the share count first.
Micrel, Incorporated - Shares Outstanding, 1995 - 3Q 2011
Here we see that the company has been rapidly repurchasing shares for most of the decade, returning net $290.5 million from 2003 – 3Q 2011. Additionally, over the same period, the company paid out $40.9 million in dividends, for a total of $331.4 million returned to shareholders versus total free cash flow over the period of $383.5 million (a payout ratio of 86%).
The following chart shows the company’s free cash flow generation over time.
Micrel, Incorporated - Free Cash Flows, 1995 - 3Q 2011
Here we see that the company’s business is moderately capital intensive, with capital expenditures averaging 25% of cash flows from operations over the last five years. Businesses that are less capital intensive are generally more attractive, as free cash flows can grow at an astonishing rate.
In the next chart, we’ll look at the company’s historical returns.
Micrel, Incorporated - Historical Returns, 1995 - 3Q 2011
What we see here is a dramatic improvement in returns over the last five years, especially in the last year. This is important, as we would never want to rely on one anomalous year (either good or bad) in making predictions of future returns. What we see here is that the company has, for quite an extended period of time, managed to earn strong returns. Given its high cash balance, it is better to use an enterprise value based metric that strips out excess cash, so the invested capital figures are more relevant here, and we see that on a free cash flow basis (CROIC) the company has enjoyed returns often above 30%, and on an earnings basis, often above 20%. In either case, this is extremely good.
Let’s take a closer look at the company’s cash balance over time.
Micrel, Incorporated - Capital Structure, 1995 - 3Q 2011
Here we see that the company has traditionally eschewed debt and maintained a high cash balance. Furthermore, the company’s cash balance has grown dramatically (more than doubled!) over the last ten quarters, while its meager amount of debt has been completely repaid.
Now we’ll take a look at revenues.
Micrel, Incorporated - Revenues and Margins, 1995 - 3Q 2011
This chart shows us that the company has had only marginal revenue growth over the last half decade. Note the dramatic increase in 2000. At first, I thought this was related to a spin-off, but from the 10-Ks around that period, it appears to be related to a real organic demand that slumped after the dot-com bubble burst. More than a decade later, and the company has yet to reach the same heights (despite the massive growth in personal computers, laptops, tablets, and smart phones!). The company’s revenues have been declining fairly consistently since 3Q 2010, and the company projects that this will continue next quarter.
Another thing to note is that, unlike many other companies profiled on this site, MCRL does not have inordinate exposure to a single customer. Its largest customers account for less than 10% of revenues, so the loss of a single customer is unlikely to kill the company. It will sting, but it won’t be fatal.
One bright note from this chart is that margins have been expanding since earlier in the decade, and that despite the recently declining revenues, gross margins have largely expanded over the last few years (though they have yet to return to mid-decade highs).
Some other things to note: Insiders own 20.5% of the company, though 19.3% is owned by the CEO, so outside of him, there is very little ownership. Also, the President, CEO and Chairman of the Board are all the same person (Raymond Zinn, 73), which often presents corporate governance issues (such as the fact that his compensation more than doubled from 2009 to 2010).
In valuing MCRL, I assumed continued revenue declines for the next two years, followed by a recovery for three years. I used the company’s long-term average margins, which were slightly lower than the recent average, and then worked my way through to free cash flows. Unfortunately, there does not appear to be a sizable margin of safety to warrant an investment, however given recent market volatility, there have been some attractive entry points in the recent past.
What do you think of MCRL?
Author Disclosure: No position.
Stocks Discussed: MCRL,