*Apologies in advance if the thesis here seems unpolished and slightly disjointed. There isn't as much detail on Anadigics long-term prospects as I would like to put in and I understand the latter portion of this thesis focuses somewhat on the short-term, but Anadigics reports before market open tomorrow and I wanted to get this out before then. If you read this, you will understand there is some time sensitivity for the stock.

This idea should appeal to both short and medium-term investors who like Margin of Safety ideas with lots of optionality. To tech analysts: I believe Anadigics to be cheap and also a great play no one is looking at as a beneficiary of Nokia's woes.

----------------------------------------------------

Thesis:

Anadigics is a semiconductor company that sells into two markets: Gallium Arsenide (GaA) Power Amplifiers used for handsets and CATV broadband chips. GaA Power Amplifiers as of last quarter is roughly 75% of its revenue and 25% is broadband chips. The bottom portion of the thesis will focus on the GaA business.

After getting pummelled on two one-time events, I believe the stock has hit a bottom with tremendous margin of safety, other growing customers/business which is not being valued properly, and insider buying. I believe Anadigics is poised to rebound within the next 3 to 6 months.

Margin of Safety:

Before going into Anadigics business, I think it may be easier and more appealing to both tech and non-tech value investors to start with calculating a margin of safety valuation that supports a floor at these levels. The examination of its assets and balance sheet will then dovetail into a discussion of its business.

Currently, Anadigics is:

1) Trading near tangible book value

2) Taking market value minus current assets, the market currently values Anadigics near-fully depreciated semiconductor fabrication facility at ~65M dollars. "What a Bargain".

At $3.20, Anadigics is currently valued at $214M. They currently hold $94.6M in cash with no debt and $149M in current assets. There is a modest amount of accounts payable and accrued expenses on the liabilities side of the balance sheet. Tangible book value stands at $196. So Anadigics is trading very close to tangible book value.

Taking the market cap minus current assets, we arrive at $65M. What is on the long-term side of the assets sheet is a semiconductor fabrication facility based in Warren, NJ, mostly for Gallium Arsenide Power Amplifiers. 

$65M is a gross underestimation for the value of Anadigic's fab and represents a bargain asset for potential acquirors. Several things to consider:

1) Anyone following TQNT, RFMD, SWKS, AVGO (anadigics competitors) will tell you that GaA Power Amplifiers, after a long slumber of declining $ content per handset, has finally been enjoying not only general unit growth in the handset market, but unit growth per handset with the emergence of 3G/4G. You need more power amplifiers to handle and be backwards compatible with different bands. There was a shortage in capacity last year and some (TQNT) are still reporting tightness.

2) New fab expenditure comparisons: TQNT has been spending roughly $40M per quarter or $160M annualized to build capacity in Oregon and Texas for GaA Power Amplifiers. This compares to the $65M the market is valuing for Anadigics entire GaA PA fab. The importance of capacity was impressed on Triquint last year when they lost the iPhone 4 CDMA slot because lack of capacity. Anadigics spent roughly $100M in 2000 dollars to bring this inline.

3) Avago has indicated they will need further capacity past this year.

4) WIN and AWSC, two large GaA foundries have been building capacity to handle the increasing demand from 3G/4G phones of GaA Power Amplifiers.

5) Anadigics fab was once on the books for $123M, but has been depreciated away.

6) Just as a point of comparison, a new 300mm (yes I know it's cutting edge, but this is just to compare) fab can cost in shell and equipment, upwards $2-4 B to build. A single stepper machine costs roughly what the market is valuing Anadigics entire fab.

Business - Short Term and Long Term Light at The End of the Tunnel:

Under normal circumstances, I would probably avoid buying Anadigics - most value investors would designate it currently as a "cigar-butt" investment. Why buy this now? 

As I stated earlier in Point 1 in Margin of Safety, Power Amplifiers have a growth trajectory in units that should be enjoyed for several years to come (unless you believe 3G/4G is not happening). Not all semiconductors going into handsets enjoy this kind of growth. Handset designers want cheaper chips, more powerful chips, and more space on their board. Integration of functionality into single chipsets (System on Chip - if you want an example of this kind of disintermediation, look into high flying and subsequent collapse of SIRF...also I believe BRCM combo chips look to be in danger of integration, but that's another story). Power Amplifiers cannot be integrated into, say the baseband or application processor (QCOM for example).

After years of consolidation and declining $ content per handset (you only needed one Power Amplifier in old handsets...in 3G you need 2-3, and 4G you need even more); Anadigics is one of the few remaining Power Amplifier makers in the world. Skyworks is the largest, followed by Triquint, RFMD, and Avago. Because of massive unit volumes that handsets push, winning a slot in a design can mean big fortunes and conversely big losses for any handset semiconductor manufacturer.

Last quarter, Anadigics lost the Power Amplifer slot at RIMM. Before this was divulged, Mario Rivas and his right hand man Greg White (SVP) resigned. This situation represented as-bad-as-it-gets.

RIMM represented 38% of last quarter's total revenue, or $16.5M dollars. On the call, new CEO Ron Michels, a veteran of the company and engineer by background, stated that guidance for 2Q would be $36M, with RIMM revenue falling $10M alone. Broadband would recover to below historical norms of $10M.

Doing the numbers, that means for guidance this quarter:

1) RIMM $6.5M

2) Broadband $10M

3) Other wireless customers $19.5M (Flat Quarter on Quarter which shouldn't be the case)

It is the Other wireless customers I want to focus on. Other Wireless customers was $19.6M last quarter and they include largely ZTE, Huawei, LG and Samsung; all of whom have been taking share from Nokia.

It is Anadigics exposure to ZTE and Huawei that should be of interest. For most of the past two decades, Chinese handset manufacturers have not had a meaningful impact on semiconductor content: you may recall such names as Pantech or BenQ. ZTE and Huawei though have meaningfully gained share in the past year at the expense of Nokia and are now producing volumes that should not be ignored by those following semiconductor food chains - 28M units this quarter (16% sequential increase), on their way to 140M units run rate combined by 2011 end. Anadigics, with their strength in TD-SCDMA designs (China's own band) won numerous Android slots in both ZTE and Huawei.

In other words, it seems that the new CEO sandbagged the quarter by a large margin by assuming their non-Rimm revenue wouldn't grow sequentially (in a seasonal uptick quarter).

Few analysts are talking about these two as big beneficiaries to Nokia's precipitous downfall. In one quarter, Nokia reported unit sales in Greater China falling from 20M to 10M. Someone gained that and largely it wasn't Apple. Anadigics services both these makers as well as LG and Samsung which have also gained modest share last quarter.

Closing:

I believe the bar has been set extremely low for Anadigics. With large margin of safety on the balance sheet, a valuable asset being undervalued, exposure to a hot semiconductor segment with no threat of disintermediation, and extremely low expectations, I believe Anadigics is a good long from here on out. Apparently the new CEO thinks so as well, a few days after the last call he purchased purchased $144,000 in shares.

Just on the basis of valuing its assets and IP, I believe Anadigics to be worth at least $300M or $4.50. If/when the market realizes ANAD is levered to growth customers outside of RIMM and a growth semi subsector, the stock should exceed this asset-based valuation. The fab is running at 50% utilization, so there is a lot of operating leverage in this business model. 

I will reiterate the point on Other Wireless Customers as a catalyst:

 

It is the Other wireless customers I want to focus on. Other Wireless customers was $19.6M last quarter and they include largely ZTE, Huawei, LG and Samsung; all of whom have been taking share from Nokia.

It is Anadigics exposure to ZTE and Huawei that should be of interest. For most of the past two decades, Chinese handset manufacturers have not had a meaningful impact on semiconductor content: you may recall such names as Pantech or BenQ. ZTE and Huawei though have meaningfully gained share in the past year at the expense of Nokia and are now producing volumes that should not be ignored by those following semiconductor food chains - 28M units this quarter (16% sequential increase), on their way to 140M units run rate combined by 2011 end. Anadigics, with their strength in TD-SCDMA designs (China's own band) won numerous Android slots in both ZTE and Huawei.

In other words, it seems that the new CEO sandbagged the quarter by a large margin by assuming their non-Rimm revenue wouldn't grow sequentially (in a seasonal uptick quarter).

Few analysts are talking about these two as big beneficiaries to Nokia's precipitous downfall. In one quarter, Nokia reported unit sales in Greater China falling from 20M to 10M. Someone gained that and largely it wasn't Apple. Anadigics services both these makers as well as LG and Samsung which have also gained modest share last quarter.