In a recent announcement, Microchip Technology Inc. (NASDAQ: MCHP.US), themicrocontroller, mixed-signal, analogue and Flash-IP solutions provider, reckons it may make a cash offer for London-listed connectivity specialist CSR (LSE: CSR), although discussions between the parties are at a very preliminary stage.
It’s enough to set the heart a flutter for many an existing CSR shareholder and, indeed, the shares are up around 38% to 800p over just three trading days since the news broke.
The long and winding road
I invested in CSR once, back in the heady and frothy bull days of 2005. Back then, CSR’s Bluetooth technology seemed all the rage and the firm posted a series of wonderful trading updates that drove the shares up like a rocket.
Needless to say, CSR’s growth story didn’t play out to be as straightforward as it seemed and, after peaking at around 1500p during 2006, the shares were below 200p as late at the end of 2011. So today’s share price marks a 300% rise over a three-year period, driven, perhaps, by improving prospects and a buzz around the concept of ‘the internet of things’. I’m not going to pretend to be an expert on CSR’s technology, or the markets in which it operates, but it’s clear that CSR’s business is attractive to Microchip Technology, judging by the American company’s overtures.
Thinking back to 2005, and CSR’s performance since, it seems that CSR’s technology and market position have not proved as ‘bullet proof’ as fellow London-listed technology firm ARM Holdings, for example. CSR seems more exposed to competing technologies and its operations more cyclical. Valuations and financial results have fluctuated over the last decade, and growth has not been as robust as trading around 2005 suggested it might be. The firm’s recent record looks like this:
|
Year to December |
2009 |
2010 |
2011 |
2012 |
2013 |
|
Revenue ($m) |
601 |
801 |
845 |
1025 |
961 |
|
Net cash from operations ($m) |
50 |
78 |
13 |
74 |
82 |
Cash generation has been patchy. It has not been an obvious call to see growth ahead for some time, and investors picking up the shares on the big dips, perhaps during late 2009 or at the end of 2011, have done well with their investments.
Looking ahead
City analysts keeping an eye on CSR reckon the firm will grow its earnings by about 3% this year and 19% in 2015. That might sound quite impressive, but looking at CSR’s record, there are many ups and downs in its earnings. Maybe the tailwind behind CSR’s trading niche is getting up and forward prospects are improving, but does that justify the valuation now? The forward P/E rating is running at over 23 for 2015 and that cyclical-elephant is still in the house.
There’s, arguably, a bid premium built-in to CSR’s share price just now. Share price movements tend to precede news: I bet some of CSR’s share-price progress since 2011 is down to takeover speculation. The biggest risk I can see with CSR now is valuation: It’s easy to imagine the share price slipping back if potential suitors walk away.
In an investing situation like this, if I’d seen my shares rise by over 300% after buying good value, and after a rapid rise over the last three days, I’d most likely eliminate downside risk by selling. It seems to me that following the mantra ‘the faster the share-price rise, the faster the sale’ can often serve well. Sure, there could be further gains to come, but why take the risk when so many other opportunities exist on the stock market?
What now?
Sometimes, it seems wise to consider the performance of the shares of a company as well as the prospects of the underlying business and its valuation. That’s what value investing is all about as a method of attempting to time the purchase and sale of investments, in my book.
