It’s tough to find a technology stock that’s up these days. Then there’s Conexant Systems Inc.
Shares of the Newport Beach communications chipmaker are off more than 50% in the past few months, making it among the worst performers in the tech sector.
The stock is back to around $2 with a recent market value of $1 billion, the same place it was when Chairman Dwight Decker returned as chief executive to implement a turnaround plan in late 2004.
Here’s the rub: The stock has dropped even though Conexant has seen zero downgrades, settled a worrisome patent dispute with Texas Instruments Inc. and Decker’s turnaround plan appears to be on track.
Analysts chalk up part of the slide to the overall downturn in the chip sector. But Conexant’s been hit harder than others.
The Philadelphia Semiconductor Sector Index is off about 25% since March. Conexant rival Broadcom Corp. of Irvine is off about 50% from its spring high.
A nagging concern: Conexant’s heavy debt load.
The company is set to update investors on Thursday, when it releases its report for the quarter ended June 30.
Analysts expect the company to post net income of $14.4 million, versus a loss of $19 million a year earlier. Sales are seen coming in at $251 million, up 27%.
Conexant’s business is strong with products in the right markets, according to analysts.
“I don’t think it’s specific to Conexant,” said Jay Srivatsa, an analyst at Roth Capital Partners LLC in Newport Beach. “It’s a general malaise.”
That malaise has been pronounced for Conexant. It shares hit a high in April after doubling from the fall and early spring.
Stocks with less than $2 billion in market value haven’t fared well during the downturn, said Tristan Gerra, an analyst with Robert W. Baird & Co. in Milwaukee.
“Those small caps got hit disproportionately, including Conexant,” Gerra said.
Besides the market downturn, the sector has stumbled over concerns about sales to computer makers, Gerra said.
In the past six months, shares of chip bellwether Intel Corp. have slid about 20%. Rival Advanced Micro Devices Inc. has lost 40% of its value.
Another issue: possible softness for chip companies that cater to low-end cell phones, Gerra said.
Debt Issue
Conexant’s other trouble is its balance sheet.
This year, the company paid off roughly $200 million in debt. But another $515 million in debt comes due in February, according to Aalok Shah, an analyst with D.A. Davidson & Co. in Portland, Ore.
Conexant is looking to get some help from its roughly 38% stake in Newport Beach-based Jazz Semiconductor Inc., which recently filed to go public.
Jazz first filed to go public in 2004 but failed to do so after some 18 months.
Conexant also could sell some real estate in Newport Beach to raise cash.
Stock watchers hope Conexant might be able to shake itself of some of these concerns with a strong quarterly report this week.
But the stock’s fate may rest more with its chip peers, Shah said.
“If it’s a good quarter, it might help somewhat,” he said. “It may not matter.”
Intel, Broadcom and Texas Instruments could have a big impact on the performance of the chip sector, and possibly sway Conexant’s shares
The results haven’t been overly impressive so far.
Broadcom reported initial results last week, coming in below expectations on revenue. Intel beat quarterly estimates in July, but its guidance disappointed investors.
Still, analysts overall give Conexant’s shares a “buy” rating. They have a lofty target price of near $5.
Conexant’s key market of chips for satellite TV boxes looks good, Shah said.
“After speaking with several of our contacts we believe Conexant is poised for another good quarter,” he wrote, noting the company has won contracts.
Demand looks good for digital subscriber line chips, especially in China, Baird & Co.’s Gerra said.
“Conexant has good presence in the Chinese market,” he said.
Decker appears to have his turnaround plan on pace, according to Gerra.
Back in early 2004, Decker stepped down as chief executive after Conexant bought Red Bank, N.J.-based GlobespanVirata Inc., a maker of chips for digital subscriber line modems.
Decker became chairman. But the deal never produced produce profits.
The board asked Decker to come back in late 2004 to push through a turnaround. Decker called for adjusted profits by the end of 2005. He beat its own timeline, getting out of the red by September. Now he’s focused on fattening profits.
One way he’s done that is by shifting more engineering to India with headcount there at 900 and growing.
“It’s really an engineering powerhouse,” Gerra said.
Gerra calls the stock is cheap. With the recent drop, Conexant’s price-to-earnings ratio is around seven.
“Really, we view this stock as a bargain,” he said.
