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Hittite Microwave: Debt-free, 74% of Total Assets in Cash and Historical Return of 37x the S&P 500

January 18, 2012 | About:
As described by Warren Buffett on the performance of the great businesses over time, the return on equity is one of the important figures as well as indicators for great investment opportunities in the long run. On the search for them, I personally thought that if a certain business has a record of increasing their revenues over time, improving profitability over time, including impressive double-digit return on equity, and consistent growing cash positions, it would fit nicely in a basket of long-term investment opportunities.

One of the stocks which meets all these criteria is called Hittite Microwave Corporation (HITT), the company involved in designing and developing high-performance integrated circuits, modules, subsystems and instrumentation for technically demanding radio frequency microwave and millimeter wave application. The business is supported strongly by the global demand for mobile communication services and for real-time access to diverse type of data. The systems could be integral to wireless networks such as cellular telephone, fixed wireless and satellite communication systems, as well as wired networks such as cable TV, broadband access and optical data networks.

HITT has a diverse customer base, markets and applications, giving the firm multiple long-term opportunities. In 2010, the company sold products to around 3,000 commercial and U.S. government customers in fields such as automotive, broadband, cellular infrastructure, Fiber optic, Microwave and Millimeter wave communications, Military, Space, Test and Measurement. In terms of manufacturing, HITT does not have the manufacturing site in house. The company design and develop the proprietary products and utilize third-party foundries to manufacture, and in some case, assemble the products. The manufacturing outsourcing has given HITT the flexibility for the capital instead of heavily investing into manufacturing sites and processes.

For HITT’s stock price over years, since 2005, it does not experience the so wide fluctuations like much of other small, mid-cap corporations. Since August 2005, the stock stayed at $18 level, then it got up to nearly $50 at the end of 2007, then back down to $25 in the beginning of 2009. Now it is hovering around $51.5 per share. If any investor has been holding the stock since the $18 level, then kept it until now no matter the fluctuations, he would realize an annualized return of 15% over the 7.5-year period.

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The total gain for HITT over that period was 161%, whereas the NASDAQ only returned to investors 24.3%, equivalent, and the S&P 500 returned the much less, at 4.5% So the gain for the company is more than 6.6 times the return on the NASDAQ and nearly 37.8 times the S&P500.

Indeed, the market price has somehow reflected the operating performance of HITT over the same period. HITT historically delivered all good growing numbers in the top line, bottom line and cash positions. Here is a snapshot of the 10-year profitability and cash position of HITT.

USD Millions 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Revenue 30 31 42 62 81 130 156 180 163 244
Operating Income 7 6 11 21 30 62 72 80 70 119
Net Income 4 4 7 13 21 43 51 54 46 77
Operating Cash Flow 11 15 26 38 53 60 62 81
Free Cash Flow 8 5 23 34 37 55 55 59


HITT experienced a very strong annualized growth rate over the years, with revenue of 23.3% and net income of 34.4%. For cash position of operating cash flow and free cash flow, it begin to show an increasingly positive cash level since 2003, and until now, the operating cash flow and free cash flow had compounded annualized growth of 28.3% and 28.4%, respectively.

Analyzing the profitability, the DuPont Model should be used to analyze to see what has contributed to the double-digit ROE over the long period of time.

2003 2004 2005 2006 2007 2008 2009 2010
Net Margin % 13.8 19.3 25 32.8 32.8 29.9 28.3 31.5
Asset Turnover 1.07 1.3 1.08 0.98 0.77 0.74 0.6 0.7
Financial Leverage 3.35 2.33 1.13 1.11 1.08 1.08 1.07 1.08
Return on Equity % 49.4 67 37.6 35.7 27.5 23.8 18.1 23.7


Clearly, we can see that it was because of the gradual rising in net margin, from nearly 14% in 2003 to 31.5% in 2010, and it was offset by the gradual decrease in both asset turnover and the level of financial leverage. Now the financial leverage is only around 1x, indicating the improvement in the conservativeness of HITT’s capital structure.

Indeed, HITT’s financial structure is very liquid and conservative, with D/A of only 5.6%, and the company is nearly debt free. Whereas in the asset side, the most significant item is cash, the level of cash takes more than 74% of the total asset, with the amount of $351 million, nearly 44% higher than the revenue of fiscal year 2010. HITT market capitalization is of $1.6 billion, and adjusting the level of cash, the enterprise value of the company stays at around only $1.26 billion.

With great performance over time like that, HITT would not be valued cheaply by the market. In terms of valuation, HITT has 18.7x earnings, 3.6x book value and the cash flow yield is staying only at 6.1%. However, comparing to the historical average valuation of the five years with the P/E of 22.8x, P/B of 4.7x and P/CF of 19.4x, the current valuation would indicate HITT to be undervalued.

For the gurus buying, Joel Greenblatt, the author of "Magic Formula Investing," has kept buying the shares since their $61 level, until they reached $55, and now he is holding nearly 12,200 shares with the total fair value of more than US$600,000. In contrast, the insiders have kept selling the shares out, including the 10% owner, Ayasli Yalcin.

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To conclude, HITT is one of the small, mid-cap stocks to fit nicely in a basket of the diversified value portfolio to hold for the long run. Nevertheless, I personally would like to see the stock price be down a little more to begin accumulating positions.

This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk

About the author:

Anh Hoang
Money manager into global equities, especially with US and Vietnam markets. CFA level 3 candidate. Lecturer for Stalla - CFA course in Vietnam

Visit Anh Hoang's Website


Rating: 4.1/5 (7 votes)

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