RBC Capital Upgrades Microsemi Corporation (MSCC) to Top Pick

RBC Capital upgraded Microsemi Corporation (NASDAQ: MSCC) from Outperform to Top Pick with a price target of $46.00 (from $45.00).

Analyst Mitch Steves cited: : 1) diversified revenue, 2) positive view on PMCS, 3) potential for 64% gross margins, 4) de-leveraging and 5) valuation suggesting near-trough.

Steves commented, "We are upgrading Microsemi to Top Pick. The company remains as one of the rare semiconductor companies with a current valuation level near its 2008-2009 trough while maintaining a notable EPS growth story. As Microsemi integrates PMCS, pays down debt and executes on its FCF generation we see ~40% upside at this point in time. If revenue dynamics are challenging for the semiconductor industry as a whole, we note that Microsemi's EPS should continue to see notable growth in FY17E and beyond. Net Net: we are confident in MSCC's ability to execute on its cost reduction initiatives and believe the focus remains on using excess FCF to pay down debt. Raise PT to $46 (from $45)."

Top Five Thesis Points

1. Diversified Revenue Base: MSCC now operates in five distinct segments (addition of storage) with a healthy backlog in stickier end-markets: Aerospace, Defense & Security

2. Success with Cost Cutting Acquisitions: We view the PMC-Sierra transaction as a cost cutting story and note their performance with similar transactions have been successful (Vitesse transaction in FY15)

3. Potential for 64% Gross Margins: While we currently model for 62% gross margins, we see potential for a 64% margin profile if COGs savings are realized over the next 12-18 months

4. De-Leveraging to Improve Multiples: In a potentially challenging demand environment, we note that debt payments and cost synergies will give Microsemi a notable tailwind over the next 4-6 quarters

5. Near-Trough Multiples: Microsemi is currently trading at ~10x FTM P/E and we note this is 20%+ below its 10-year average of 12.8x

For an analyst ratings summary and ratings history on Microsemi Corporation click here. For more ratings news on Microsemi Corporation click here.

Shares of Microsemi Corporation closed at $33.24 yesterday.

You May Also Be Interested In

• JPMorgan Upgrades TMBThanachart Bank PCL (TTB:TB) to Overweight
• Morgan Stanley Upgrades Sea Ltd. (SE) to Overweight
• Berenberg Downgrades Learning Technologies Group (LTG:LN) (LTTHF) to Hold