On Aug 3, 2015, Zacks Investment Research downgraded touchscreen chipmaker Atmel Corporation ATML to a Zacks Rank #4 (Sell) from a Zacks Rank #3 (Hold), primarily on the back of disappointing second-quarter 2015 results. Despite the relative weakness, the stock is currently trading at a forward P/E of 24.1x with long-term earnings growth expectation of 20.0%, which signify its inherent long-term growth potential.
Why the Downgrade?
Atmel reported second-quarter 2015 net income of $6.3 million or 2 cents per share compared with net income of $19.2 million or 5 cents per share in the year-earlier quarter. The sharp year-over-year decline in earnings was primarily attributable to lower revenues due to soft global semiconductor market and currency woes. The company also failed to meet the Zacks Consensus Estimate as adjusted earnings (including stock-based compensation expenses) of 5 cents per share fell short by a couple of cents.
Atmel reported net revenue of $306.4 million for the quarter compared with $355.5 million in the prior-year quarter. Revenues were adversely affected by foreign currency headwinds and a general slowdown in the overall semiconductor industry, resulting in softness in almost all the major end markets and all geographies. Net revenue also missed the Zacks Consensus Estimate of $318 million.
In addition, Atmel operates in an intensely competitive landscape. With the rise in competition within the industry, the company is witnessing a decline in its product prices, which in turn is detrimental to its overall margins. Negative macroeconomic conditions, slowdown in the semiconductor space and softening end-market demand are further hurting the company’s top-line growth.
Furthermore, Atmel is highly exposed to foreign exchange rate risk. The primary exposure relates to operating expenses in Europe, where a significant amount of the company’s manufacturing is located. An unfavorable movement in foreign currency exchange rates might adversely impact the company’s bottom line.
There seems to be no respite for Atmel in the imminent future as the broader industry parameters are likely to continue their downward swing. Consequently, for the third quarter of 2015, the company expects revenues to decline sequentially to a range of $283 million to $303 million. The weaker revenue outlook is partly attributable to the fragility in the semiconductor market that is seeing waning end-market demand and continued unfavorable exchange rates.
Other Stocks to Consider
Some other stocks in the industry that look promising include Exar Corp. EXAR, Cirrus Logic Inc. CRUS and Himax Technologies, Inc. HIMX, each carrying a Zacks Rank #2 (Buy).
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