Actions Semiconductor ACTS
December 24, 2008 - 3:17pm EST by
2008 2009
Price: 1.60 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 133 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT

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In a world of newly cheap stocks, ACTS is a profitable fabless Chinese semiconductor company that has no debt, no subprime mortgage or Bernie Madoff exposure, and nearly two times its current market cap in cash. First recommended on VIC in 2007 at $8.21 per share, ACTS has fallen with the market to $1.56 while remaining profitable and cash flow positive, and maintaining a pristine balance sheet with cash and marketable securities of over $250 million. The current market cap of $130 million is at bargain-basement levels compared to current and historical earnings as well as the significant volume of liquid assets.
Both margins and revenues have been significantly affected by increased competition and the economic downturn (ACTS principally designs systems-on-a-chip for portable music players), but remain quite robust in comparison to the magnitude of the recent selloff. ACTS earned $45 million in net income over the last year for a current ttm P/E of less than 3.0; earnings in the latest quarter ended October 30th were $7.4 million or 9 cents per ADS. Results for the near future are difficult to foresee with accuracy, but analysts currently project ACTS to earn $0.20 per share on $88 million in revenues for a forward P/E under 8, still remarkably cheap given the cash holdings. Actions' strong position in the lower-cost end of its market could prove an asset during the economic downturn, particularly if it results in decreased competition from less well-capitalized firms. With an eventual market recovery, a return to anywhere near past levels of profitability would lead to outsized returns from the current stock price - ACTS earned over $73 million in both 2005 and 2006, a historical P/E of only 1.82 for each of these years' results.
The extremely low valuations to current and historical earnings are particularly remarkable given the sizable cash and investment position and no debt. ACTS currently has $261 million in current assets net of all liabilities, including $53M in cash and equivalents; its $195 million of marketable securities are short-term (<12 mo) commercial paper of the major Chinese commercial banks, and have not lost any value as of the Oct 30 quarterly report. With no liabilities to speak of, cash and securities come to $3.09 per ADS, making ACTS satisfy Graham net-net criteria independently of its cheap trailing P/E.
Although several small acquisitions are currently planned, ACTS should have relatively limited capex needs as a fabless company and has so far been very conservative with its cash. ACTS does have an active stock buyback program in place, and has spent $12.9 million on share repurchases since May 2007; the recently extended authorization allows buyback of a further 4.8 million ADS. That said, I really wish they would get a lot more aggressive with their repurchases & would fault them for not being more active; clearly such a steep discount to cash for a profitable firm would no longer persist otherwise. Management did state on the recent call that they plan to make attention to the buyback "a top priority", hopefully we will see more evidence of this going forward.
In summary, with a debt-free balance sheet holding over $3 per share in cash and marketable securities, and with ttm and historical P/E ratios in the very low single digits, ACTS has a substantial margin of safety and generous expected long-term return, particularly if management continues to follow through with a significant share repurchase. There is certainly no shortage of cheap stocks here (is the VIC Bargain Meter still really only at 50?), but for me ACTS represents a straightforward and attractive value investment.


cheap valuations to earnings and cash
eventual recovery in demand, helped by ACTS' low-cost market position
stock buyback
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