Could Be a Monolithic Misstep

 | Apr 10, 2013 | 12:00 PM EDT
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Since the start of the year, one of Monolithic Power's (MPWR) shareholders has nearly doubled its stake in the chipmaker. Adage Capital Management, a firm co-managed by Phil Gross and Robert Atchinson, recently reported that it now holds a little over 2 million Monolithic shares, or 5.6% of the company -- up from 1.2 million at the end of December -- according to a 13F filing with the SEC.

Monolithic Power has market capitalization of about $820 million, with the stock seeing average daily trade of about 300,000 shares. For all of 2012, it reported sales of $214 million, up 9% from the prior year -- though that came in below the $219 million recorded for 2010, and operating income and earnings have followed a similar pattern. In light of this, we aren't sure we would take the year-over-year improvement as an indicator of sustainable growth that may persist at a similar rate over the next several years; in fact, we'd worry that there may be an longer-term downward trend in Monolithic's business.

Another negative sign is that cash flow from operations last year, at $25 million, was actually a good bit lower than it had been in 2011 and barely covered Monolithic's $21 million in capital expenditures. The balance sheet is fairly strong, with $172 million in cash, cash equivalents, and investments. However, even if we look at the company's enterprise value relative to earnings before interest, taxes, depreciation and amortization, we get a very high multiple. The trailing price-to-earnings ratio isn't particularly good, either, though Wall Street analysts are bullish on the company's prospects -- and, as a result, the forward earnings multiple is 18x. The most recent data shows that 15% of the float is held short, revealing that many market watchers believe Monolithic is not a good value.

One peer with which we can compare Monolithic is Analog Devices (ADI). This company's financial performance has also been struggling of late, with slightly lower top and bottom lines in the most recent quarter (ended early February). Still, its business has been generating a significant profit. While the trailing P/E of 21x does not place Analog Devices in pure value territory -- and certainly does not correspond well with anything short of moderate growth in earnings, let alone a decline -- it's at least more respectable than what we see at Monolithic, from our point of view. Analog Devices also pays a dividend yield of 3.1% at current prices.

So, to reiterate, while it's encouraging to see Monolithic's profit and sales growth vs. 2011, investors should not assume it will continue on that trajectory -- and, despite a significant cash hoard, cash flow from operations last year nearly failed to cover capex. We're not confident enough in our analysis to recommend taking the short side here, given cash accounts for such a significant share of its market cap. But the stock does look expensive relative to earnings and cash flow. As a result, we would avoid following Adage's recent move here.

-- Written by Matt Doiron

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