Lattice Semiconductor LSCC shares have soared 44% in less than three weeks. So it makes sense to visit the story to see what’s going on.
After all, this is a Sell-rated stock (Zacks Rank #4) and the analysts polled by Zacks have lowered estimates since the company reported a quarterly loss and missed on the top line. The Zacks Consensus Estimate for the March quarter has therefore moved down from $0.07 to -$0.05. So what could possibly be the reason/s for the stock’s outperformance?
Exploring The Reasons
First of all, we have FBR analyst Christopher Rolland to thank for setting off a rumor that Lattice may have landed some business with Apple. The analyst said that three things about management’s discussion of the earnings report pointed to an Apple win. These were a jump in the revenue forecast, management’s statement that the jump would come from consumer electronics and also that an influential customer had asked it to look for a couple of sources for some parts (a standard practice by bigger players to ensure that there are no disruptions in supply).
Since Samsung, Lattice’s largest customer has been struggling in recent times, investors naturally responded positively.
FBR and Robert Baird analysts raised their price targets. Both analysts have an outperform rating on the shares.
Second, there was a rumor, this time by Reuters, which quoted unnamed sources as saying that an unnamed Chinese company had expressed interest in the company. The sources also said that Lattice had enlisted investment bank Morgan Stanley’s help to review offers from prospective buyers. This could be a good deal for investors wishing to cash out and there could be something in this rumor given China’s growing appetite for stakes in U.S. companies.
Purely The Rumor Mill?
The recent turn of events appears positive for Lattice, but let’s also consider how big spenders feel about the company. In the last-completed quarter, hedge fundsRhumbline Advisers, Granite Point Capital Management, Alliancebernstein, California State Teachers Retirement System and Putnam Investments reportedly added to their positions.Director Balaji Krishnamurthy sold some shares however.
The Shares Are Risky
So let’s take a look at each of the rumors and try to figure out what might be the real implications for the company. With respect to Apple, it would mean a high-volume business since the iPhone maker usually ships in millions. But what is also significant is Apple’s history of striking very tough deals with its suppliers and its stringent quality standards that can easily result in significant pressure to the bottom line.
Lattice makes programmable logic devices that are relative low-end when compared with its illustrious peers Xilinx XLNX and Altera (now a part of Intel INTC). It’s not clear how much pressure this relatively smaller player will be able to stomach.
Second, with respect to China, the deal could be a positive. But note that any deal that Chinese companies strike for ownership or control in U.S. companies have to pass through the Committee on Foreign Investment in the United States (CFIUS). This scrutiny often kills deals, as in the recent case of Tsinghua Unispendor, which pulled out of a deal to buy a Array5% stake in Western Digital WDC for $3.8 billion.
Given the uncertainties, it could be a better idea to check out the stock’s rich valuation: P/E of Array9.89, above the industry’s Array2.70 and PEG of Array.45 above the industry’s 0.72.
Far safer would be stocks like Ixia XXIA, Broadcom, Extreme Networks, or Netgear, all of which have a Zacks Rank #Array (Strong Buy).
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