FBR Capital Markets said Atmel Corp. (NASDAQ: ATML) hosted its first analyst day since chief executive officer Steve Laub took the reins in mid 2006, reviewing key segment strategies and raising its financial margin targets. The brokerage maintained its market perform rating on shares of Atmel with a price target of $17.
Indeed, Atmel now targets 54 percent gross margins and 25 percent operating margins by year-end 2013, up from its current margins of 51 percent/22 percent, a somewhat anemic 300-basis-point increase to its operating margins versus current performance and possibly disappointing some investors, said Craig Berger, an analyst at FBR Capital Markets.
Beyond this, Berger thinks Atmel's business is robust with microcontroller (MCU), maXTouch, and memory shipments likely to grow in second half of 2011 versus first half of 2011.
While investor focus is on Atmel’s maXTouch business, Berger thinks the 32-bit MCU market is also a solid growth opportunity. Figures show that 32-bit MCUs grew from $65 million in 2008 to $90 million in 2009 (despite the downturn) and to $175 million in 2010, with another year of growth in 2011.
Berger said Atmel seemingly has an attractive 32-bit AVR architecture, with key competitors like Microchip Technology Inc. (NASDAQ: MCHP) seemingly behind the 32-bit MCU development curve. Atmel's management suggests that 32-bit design wins continue to be robust, encouraging for future growth and possibly a source of upside.
Encouragingly, Atmel’s lead times have declined to a now-normal six to eight weeks for most products. Berger said Atmel's channel inventories increased by almost one week in first quarter of 2011 to about eight weeks, along with internal inventory growth, a concern among some investors.
Berger said Atmel is likely to be building long life inventory to support second half of 2011 demand, with the rise in first quarter of 2011 distribution inventory driving about 3 percent revenue growth (almost one week of growth is about a 12 percent revenue adder, and Atmel is about 25 percent sell-in revenue recognition), a modest contribution overall.
Beyond the near term, Berger thinks Atmel is well positioned for several more years of outsized top-line growth given vastly increasing R&D expenditures in recent quarters. Also, the firm suggests that it has more touch-related opportunities than it can support, turning away low-end business or other non-strategic customer opportunities.
Stepping back, Atmel has done a tremendous job of winning MCU and touchscreen controller share, with fundamental strength likely to continue. Berger looks for an opportunity to get more constructive on shares at a price and time that he is comfortable with, like closer to $12–$13.
Thus, we maintain our 'market perform' rating, financial estimates, and $17 price target, based on a 20 times target price-to-earnings multiple (2011 including stock compensation), appropriate given Atmel's high growth and margin profile, said Berger.
Atmel stock closed its Monday's regular trading down 1.01 percent at $14.15 on the NASDAQ Stock Market.