ready for the next pitch?. the intersection of vision and value paul mcwilliams editor, next inning...

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The Intersection of Vision and ValuePaul McWilliamsEditor, Next Inning Technology Research

NextInning.comTelecosm 2004 – The Intersection of Vision and Value

The Intersection of Vision and Value is a focus at NextInning.com

Short-term Gains Long-term Gains Total Gains0

500,000

1,000,000

1,500,000

$2,000,000

Gain

* Based on Next Inning Model Portfolio performance as of October 15, 2004

8% of gains

92% of gains

200+% total return*

It’s where investors find big long-term gains and market-beating returns


Goals of today's presentation

• Illustrate the importance of seeking value in vision

• Illustrate how finding companies that deliver value can be more important than timing cycles, but not imply that cycles can be completely ignored

• Present what I feel are common traits among companies that deliver value

• Illustrate the challenges faced in the quest for value

• Present an example of a semiconductor company I feel will leverage vision to create shareholder value during the Next Inning

Make value more important in your investment process


Not all Visionary companies deliver Value

* Data from Yahoo! Finance


Vision creates opportunity, but not necessarily Value

• Vision without value doesn’t pay very well- Linear Technology: Up 5,862% since 1990- Cypress Semiconductor: Up 35% since 1990- Cirrus Logic: Down 50% (can we really call this vision?) since 1990

• Finding value can be more important than timing cycles- To realize the same gain as holding Linear Tech, a trader would have to make eight consecutive trades yielding 100% and, in each case, reinvest the entire yield from the previous trade*

OR

- 34 consecutive trades yielding 20% without hitting a single loser*

* Assumes trades are short-term capital gains taxed at 40% total and long-term capital gains are taxed at 25% total


Recognizing Value is the challenge

Sales

Two year Growth

Annualized P:E Ratio

NTA/Share

Company A

$100.2M

+100%

17.0:1

$7.56

Company B

$55.8M

+90%

24.7:1

$5.87

Let’s look at two companies both renowned for their vision in 1994:

Which one would you pick as the better value?


Company A: ten years at Cypress (CY)

SOXX Index

CY Market Cap1

CY Stock Value2

CY Net Tangible Assets (NTA)

CY NTA/Share

8/31/94

134.9

$801M

$9.88

$307M

$7.56

8/31/04

371.2

$1,635M

$9.76

$286M

$1.71

Change

+175.2%

-1.2%

-6.7%

-84.5%

+104.2%

1 Based on Fully Diluted Share count

2 Adjusted for Splits (1 X 2:1)

While CY’s market cap doubled, its stockholders are sitting at a 1% loss after holding faith in the vision for 10 years


Company B: ten years at Linear Technology (LLTC)

SOXX Index

LLTC Market Cap1

LLTC Stock Value2

LLTC Net Tangible Assets (NTA)

LLTC NTA/Share4

8/31/94

134.9

$1,642M

$4.77

$223M

$5.87

8/31/04

371.2

$11,374M

$35.77

$1,811M

$5.69

Change

+175.2%

+649.9%

+712.1%

-3.1%

+588.5%

1 Based on fully diluted share count

2 Adjusted for dividend reinvestments and splits (3 X 2:1)

3 Adjusted for splits only (3 X 2:1)

4 Total dividends paid on a share purchase 8/31/94 equals $9.38

If added to NTA, the per share increase would equal 156.7%

At the intersection of Vision and Value, you’ll find what I like to call: Quality Companies

LLTC Stock Value3 $5.44 $35.77 +557.5%


The seven virtues of Value

Market Potential(Vision)

Fundamentals

Management

Stockholder Friendly

Description

• Prospects of profitable and sustainable growth

• Adequate financing to avoid dilution and a clear vision of self-sustaining operations

• I would rather own a well run lemonade stand than a poorly run tech company

• Shareholder interests are not diluted with excessive options, acquisitions and / or convertible financing


Three are commonly overlooked

Differentiation

Durability of Differentiation

Operational Elegance

Description

• Creates pricing power - the basis for profit

• Maintains pricing power and allows companies to annuitize short-term investments

• A high ratio of gross profit for each operational cost dollar invested:

(gross profit / operating expenses)


Looking Back: why would (and should) an investor have picked LLTC over CY in 1994?

Management

Fundamentals

Market


Linear Tech

Excellent

Excellent

Incremental Growth

Very Good

Cypress

Excellent

Excellent

High Growth

Good

Differentiation



Excellent

Excellent

Excellent - 2.73

Good

Fair

Good - 1.68

As you can see, Linear was simply better positioned to become a Quality Company


Looking forward: finding the intersection of Vision and Value

• Companies large enough to have a record, fundamentals and management

• Companies small enough to where high growth is sustainable for a decade

• This type of potential is not reflected in the stock price – this is the primary challenge

Differentiation and its Durability are key


Intersil has the makings of a Quality Company

Management

Fundamentals

Market


Intersil

Potentially Excellent

Excellent

High Growth & Incremental

Very Good

Comments

>$500M Debt to >$700M Cash in four years

Strong Cash Flow and Balance Sheet

$5 Billion to $6 Billion SAM

Acquisitions, Share Repurchases and Options

Differentiation





Good - 1.69

Some Excellent, Some Good

Leverage Programmability and Unique Technologies

Model is 1.9 to 2.5

Intersil appears to be building the foundation of a Quality Company


Intersil is Differentiated and this differentiation comes from Durable product lines

• Programmable elements - Resistors- Capacitors- Voltage reference

• Programmable analog

• Programmable mixed signal (PMS?)

• High speed operational amplifiers

• Power control and battery management

• High speed pure CMOS analog process on 130nm (270Mhz A/D)


Intersil’s Operational strategy is a two pronged approach

• Application Specific Standard Products (ASSP)

- Leverage differentiation to capture significant markets quickly

• Standard products

- Miles Wide / Inches Deep - Slow growth, but very long life cycles and very high profits


Intersil Model

Now Model

Gross Margin: 58% 58% to 62%

Op/Ex Margin: 34% 27% to 30%

Op/Inc Margin: 23% 28% to 35%

Op/Elegance: 1.69 1.93 to 2.48

Other Operational Elegance Ratios:

Linear Tech: 3.60

Maxim: 2.59

Microchip: 2.41

Altera: 1.97

ADI: 1.94


Five companies to noodle

One to Two Year Plays

•Harmonic (HLIT)• Video delivery systems for cable,

telecom, satellite and broadcast

•Packeteer (PKTR)• Applications, traffic management

control essential for converged networks

Three to Five Year Plays

•Catalyst (CATS)• Well run commodity semiconductor

company in the process of expanding into analog and mixed-signal – OE ratio 1.67:1

• Intersil (ISIL)• Leverage durable differentiation

in high performance analog / mixed signal

•Texas Instruments (TXN)• Strong set of IP for convergence

theme


Thank You – Questions?

http://www.nextinning.com

[email protected]

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