Rating Update: Stock Rating B-Positive (3/20/20)-MACOM Technology Solutions Holdi (MTSI).

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BUSINESS

MACOM Technology Solutions Holdings, Inc., together with its subsidiaries, designs and manufactures analog radio frequency (RF), microwave, millimeterwave, and photonic semiconductor solutions in the United States, the Asia Pacific, and internationally. The company offers a portfolio of standard and custom devices, which include integrated circuits, multi-chip modules, power pallets and transistors, diodes, amplifiers, switches and switch limiters, passive and active components, and complete subsystems for more than 60 product lines. Its semiconductor products are electronic components that are incorporated in electronic systems, such as point-to-point wireless backhaul radios, high density networks, active antenna arrays, radars, magnetic resonance imaging systems, and unmanned aerial vehicles.
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INVESTMENT RATING

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Reflecting future returns on capital that are forecasted to be above the cost of capital, MTSI is expected to be a major Value Builder.

MTSI has a current Value Trend Rating of B (Positive).
The Value Trend Rating reflects very contradictory signals from PTR’s two proprietary measures of a stock’s attractiveness. MTSI has a poor Appreciation Score of 29 but a very high Power Rating of 100, leading to the Positive Value Trend Rating.

MTSI’s stock is selling below targeted value. The current stock price of $16.13 compares to targeted value 12 months forward of $18.
This low appreciation potential results in an appreciation score of 29 (71% of the universe has greater appreciation potential.)
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MTSI has a Power Rating of 100. (This very high Power Rating indicates that MTSI has a better chance of achieving attractive investment performance over the near to intermediate term than all but 0% of companies in the universe.)
Factors contributing to this very high Power Rating include: the recent trend in MTSI’s earnings estimates has been extremely favorable; recent price action has been extremely favorable; and is in a strong phase current.

INVESTMENT PROFILE

MTSI’s financial strength is high. Financial strength rating is 70.
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Relative to the S&P 500 Composite, MACOM Technology Solutions Holdi has both Growth and Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that MTSI is higher risk. Relative weaknesses include: low forecasted profitability, low historical profitability, high stock price volatility, and high financial leverage. MTSI’s valuation is high: low dividend yield, high P/E ratio, and moderate price/book ratio. MTSI has unusually low market capitalization.

CURRENT SIGNALS

MTSI’s current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; falling tax keep rate; and falling leverage.

MTSI’s current technical position is mixed. The stock price is in a 0.9 month down move. The stock has declined 31.5% from its prior high. The 200 day moving average is in an uptrend. The stock price is below its 200 day moving average.

ALERTS

Recent meaningful negative changes in investment behavior have impacted MACOM Technology Solutions Holdi (NASDAQ: MTSI): negative upside/downside volume developed.
The stock is currently rated B.
MACOM Technology Solutions Holdi (NASDAQ: MTSI) stock enjoyed a major increase of 28.4% on 3/20/20. The shares closed at $0.42. Trading volume in this advance was normal. Relative to the market the stock has been exceptionally strong over the last nine months but has declined -12.1% during the last week.

CASH FLOW

In 2019, MTSI experienced a slight decrease in cash of -$16.15 million (-8%). Sources of cash were slightly lower than uses. Cash generated from 2019 EBITDA totalled +$14.63 million. Non-operating uses consumed -$297.56 million (-2034% of EBITDA). Cash taxes contributed +$39.60 million (+271% of EBITDA). Withdrawal of investment from the business totalled +$235.97 million (+1613% of EBITDA). On a net basis, debt investors pulled out -$37.80 million (-258% of EBITDA) while equity investors furnished +$29.02 million (+198% of EBITDA).
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MTSI’s Non-operating Income, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Macom Technology Solutions Holdi Peer Group. (Since 2015 Non-operating Income, %EBITDA has decelerated very sharply.) In most years, MTSI was in the lower quartile and second quartile. Currently, MTSI is lower quartile at -2034% of EBITDA (-$297.56 million).

MTSI’s Cash Taxes, %EBITDA enjoyed a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Macom Technology Solutions Holdi Peer Group. (Since 2017 Cash Taxes, %EBITDA has accelerated very sharply.) In most years, MTSI was in the top quartile and lower quartile. Currently, MTSI is upper quartile at +271% of EBITDA (+$39.60 million).

MTSI’s Business Re-investment, %EBITDA has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Macom Technology Solutions Holdi Peer Group. (Since 2017 Business Re-investment, %EBITDA has accelerated very sharply.) In most years, MTSI was in the third quartile. Currently, MTSI is upper quartile at +1613% of EBITDA (+$235.97 million).

MTSI’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Macom Technology Solutions Holdi Peer Group. (Since 2016 Debt Investors, %EBITDA has accelerated very sharply.) In most years, MTSI was in the top quartile and third quartile. Currently, MTSI is lower quartile at -258% of EBITDA (-$37.80 million).

MTSI’s Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Macom Technology Solutions Holdi Peer Group. In most years, MTSI was in the top quartile and second quartile. Currently, MTSI is upper quartile at +198% of EBITDA (+$29.02 million).

MTSI’s Change in Cash, %EBITDA has experienced a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Macom Technology Solutions Holdi Peer Group. In most years, MTSI was in the top quartile and second quartile. Currently, MTSI is substantially below median at -110% of EBITDA (-$16.15 million).
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MTSI’s Cash, %Revenue has exhibited a volatile overall uptrend over the period. This improvement was accompanied by stability for the Macom Technology Solutions Holdi Peer Group. (Since 2016 Cash, %Revenue has experienced a very sharp decline.) In most years, MTSI was in the third quartile. Currently, MTSI is at median at +35%.

PROFITABILITY

MTSI’s return on equity has eroded very significantly since 2011 even as it recently stabilized from the 2016 level.
The key to the story for MTSI is a very strong negative trend in pretax operating return significantly offset by a very strong positive trend in non-operating factors.
The productivity of MTSI’s assets declined over the full period 2010-2019: asset turnover has suffered a very strong overall downtrend that decelerated very sharply after the 2015 level.
Reinforcing this trend, pretax margin experienced a very strong overall downtrend even as it recently stabilized from the 2015 level.
Non-operating factors (income taxes and financial leverage) had a very significant positive influence on return on equity.
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MTSI’s return on equity is lower quartile (-132.%) for the four quarters ended December, 2019.
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Operating performance (pretax return on assets) is lower quartile (-37.8%) reflecting asset turnover that is below median (0.41X) and lower quartile pretax margin (-91.4%).
Tax “keep” rate (income tax management) is at median (90.9%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is upper quartile (3.86X).

GROWTH RATES

Overall, MACOM Technology Solutions H’s growth rate has slowed considerably in recent years.
MACOM Technology Solutions H’s historical income statement growth has been lower than balance sheet growth. Revenue growth has fallen short of asset growth; earnings growth has fallen short of equity growth.

Annual revenue growth has been -14.0% per year. (More recently it has been 1.4%.)

Total asset growth has been -0.6% per year.

Annual E.P.S. growth has been -3.4% per year.

Equity growth has been 2.9% per year. (More recently it has been -31.5%.)

MACOM Technology Solutions H’s consensus growth rate forecast (average of Wall Street analysts) is 15.0% — substantially above the average of the historical growth measures.
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Relative to the Macom Technology Solutions Holdi Peer Group, MTSI’s historical growth measures are generally third quartile. E.P.S. growth (-3.4%) has been slightly above median. Total asset growth (-0.6%) has been slightly below median. Revenue growth (-14.0%) has been substantially below median. Equity growth (2.9%) has been slightly below median.

Consistent with this pattern, consensus growth forecast (15.0%) is also at the lower quartile.
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PRICE HISTORY

Over the full time period, MACOM Technology Solutions Holdi! stock price performance has been variable and significantly below market. Between March, 2012 and March, 2020, MACOM Technology Solutions Holdi! stock price fell -22%; relative to the market, this was a -52% loss. Significant price moves during the period: 1) April, 2019 – January, 2020: +105%; 2) May, 2017 – March, 2018: -73%; and 3) May, 2013 – March, 2015: +167%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 32.4% is upper quartile relative to the S&P 500 Composite.
In addition to being upper quartile relative to S&P 500 Composite, current annual total return performance through February, 2020 of 32.4% is upper quartile relative to MACOM Technology Solutions Holdi Peer Group.

Current 5-year total return performance of -5.6% is lower quartile relative to the S&P 500 Composite.
Through February, 2020, with lower quartile current 5-year total return of -5.6% relative to S&P 500 Composite, MTSI’s total return performance is substantially above median relative to MACOM Technology Solutions Holdi Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, MTSI’s overall valuation is quite high. The highest factor, the price/equity ratio, is above median. Ratio of enterprise value/revenue is above median. Ratio of enterprise value/assets is above median. Price/earnings ratio is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable.
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MTSI has a major value gap compared to the median valuation. For MTSI to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 3.41X to 1.18X. If MTSI’s ratio of enterprise value/revenue were to fall to 1.18X, its stock price would be lower by $-16 to $0.
For MTSI to fall to lower quartile valuation relative to the MACOM Technology Solutions Holdi Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 3.41X to 0.93X. If MTSI’s ratio of enterprise value/revenue were to fall to 0.93X, its stock price would decline by $-17 from the current level of $16.

VALUE TARGETS

Reflecting future returns on capital that are forecasted to be above the cost of capital, MTSI is expected to be a major Value Builder.
MACOM Technology Solutions Holdi current Price Target of $19 represents a +15% change from the current price of $16.13.
This low appreciation potential results in an appreciation score of 29 (71% of the universe has greater appreciation potential.)
Notwithstanding this low Appreciation Score of 29, the high Power Rating of 100 results in an Value Trend Rating of B.
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MACOM Technology Solutions Holdi current Price Target is $19 (+360% from the 2019 Target of $4 and +15% from the 03/20/20 price of $16.13). This dramatic rise in the Target is the result of a -3% decrease in the equity base and a +376% increase in the price/equity multiple. The forecasted decline in growth has no impact on the price/equity multiple and the forecasted increase in cost of equity has no impact either. However, the forecasted increase in return on equity has a huge positive impact.
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PTR’s return on equity forecast is 25.0% — substantially above our recent forecasts. Forecasted return on equity suffered a dramatic, erratic decline between 2011 and 2019. The current forecast is significantly above the 2011 low of 4%.

PTR’s growth forecast is 3.0% — significantly below our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2011 and 2019. The current forecast is significantly below the 2018 peak of 22%.

PTR’s cost of equity forecast is 8.6% — in line with recent levels. Forecasted cost of equity erratic but little changed between 2012 and 2019. The current forecast is below the 2017 peak of 11.0%.
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At MACOM Technology Solutions Holdi! current price of $16.13, investors are placing a negative value of $-1086 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 13.0% per year, and a return on equity of 4.8% versus a cost of equity of 7.0%.
PTR’s 2021 Price Target of $19 is based on these forecasts and reflects an estimated value of existing assets of $14 and a value of future investments of $4.

About John Lafferty 69923 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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