Symmetricom, Inc. (SYMM)
Symmetricom’s shares offer a compelling risk/reward through:
Investing at $4.50/share creates the Company at 7.1x and 5.5x FY’14 and FY’15 base case EBITDA (earnings before interest, tax, depreciation, and amortization), respectively, in an industry where the closest comp (FEIM) trades at 8.7x a healthy LTM EBITDA by virtue of selling into contracted end-markets. This is a business that, outside the 2011 restructuring, has thrown off on average about $20 million of annual free cash flow even with recent EBITDA contraction. That’s a 9x FCF multiple, 6x if you include the ~$70MM of cash on the books.
The fundamental value proposition for the timekeeping solutions industry has changed little over the years, but the shifting dynamics of protocols like IEEE 1588v2 and activities like offshore drilling reflect crucial inflection points. SYMM is cheap because the market is rightfully concerned with accelerated decline in “Old SYMM” business behind the defense sequester and wireline infrastructure cutbacks. “New SYMM” orders have heretofore remained relatively small and lumpy, but with realistic assumptions to support end-market ramp-up, the business’ market leadership/partnerships in these new solutions and recent cost reduction efforts, I believe there is a good case here for a path to driving value. Base case returns of +35% target a $6.08 price and reflect an averaging of DCF and multiples methods, though I would argue that the DCF is more indicative of the true story here as the shift from “Old SYMM” to “New SYMM” will probably take at least two years. The business currently trades at tangible book value; in a downside, I assume the business trades to a net-net value of $3.90/share ($160MM NCAV + $21MM in NOLs/R&D tax credits). Incidentally, this represents the stock’s three-year trough when a major restructuring (move to outsourcing) temporarily disrupted operations and sucked some cash out of the system. The name is hardly covered by the sellside (only B. Riley and Sidoti). I sourced the idea from a CapIQ screen that I ran for small cap names that were trading at or below tangible book and that were particularly cheap on an FCF basis. The industry stood out as an area of technical interest, and the recent price action in the context of restructuring and a changing book of business got me thinking about a potential value play.
The Market Realist Take
The company announced on October 22 that Microsemi Corporation (MSCC), a provider of semiconductor solutions differentiated by power, security, reliability, and performance, will acquire Symmetricom for $7.18 per share through a cash tender offer, representing a premium of 49% based on the average closing price of Symmetricom’s shares of common stock during the 90 trading days ended October 18, 2013. The total transaction value is approximately $230 million, net of Symmetricom’s projected cash balance at closing.
In its 4Q 2013 earnings call, CEO Liz Fetter stated that one of the issues facing the company is that many of its products are mature and no longer growing at the same rates it experienced previously. At the same time, some of its newer product lines haven’t ramped up as fast as it would have liked, and the company has also face headwinds due to the global economic slowdown and lower government spending. The restructuring plan announced in June 2013 is expected to be fully implemented by December 2013 and generate cost savings of approximately $13 million. It expects solid growth in CSAC and PackeTime in government programs. It also expects its matured product lines to continue to decline at a moderate pace in fiscal 2014. The second half revenue in 2014 is expected to be higher on the back of the sales pipeline and new product initiatives that will be driven this year.
Competitors of its synchronization products include Brilliant Telecommunications, Emrise Corp (EMRI), and Frequency Electronics, Inc, (FEIM). Competitors of its Wireless/OEM products include Frequency Electronics, Inc. (FEIM) and Trimble Navigation, Ltd. (TRMB). Competitors of its Timing, Test, and Measurement Division products include Brandywine Communications, EndRun Technologies, Frequency Electronics, Inc., and Meinberg, Orolia and Trak Systems, Inc (TRAK) (a Veritas Corporation subsidiary). Competitors of its Quality of Experience Assurance products include EXFO (EXFO), Ineoquest, JDS Uniphase (JDSU), Agilent Technologies (A), Tektronix (TEK), and Telchemy.