Description

“Optical Amalgamation”

Overview

EMCORE Corporation (EMKR) offers a broad portfolio of compound semiconductor-based products for the broadband, fiber optics, satellite and solar power markets. EMKR has two reporting segments: Fiber Optics and Photovoltaics. The Fiber Optics business segment provides optical components, subsystems and systems for high-speed telecommunications, CATV, FTTP networks as well as products for satellite communications, video transport and specialty photonics technologies for the defense and homeland security applications. The Solar Photovoltaics business segment provides products for space power applications including high-efficiency multi-junction solar cells, CICs, complete satellite solar panels and terrestrial applications, including high-efficiency multi-junction solar cells for concentrating photovoltaic power systems.

Industry Catalysts

On September 10, 2014 optical communications giant JDS Uniphase Corp. (JDSU) announced it will be splitting into two separate publicly traded entities to focus on different technology areas and to address rapidly changing market dynamics. “We believe two fundamentally focused companies best position us to stay ahead of the accelerating pace of technology change and to compete even more effectively across the unique markets we serve today,” Tom Waechter, JDS Uniphase’s CEO, said in a statement. One of the main catalysts for this split is the move to SDN’s (software defined networking), which will drive significant changes in how networks are built and operated. SDN places more control of network configuration in the hands of logically centralized software—putting great control of network-based innovation and differentiation in the hands of network operators. The separation of JDSU along with the negative headwinds SDN will provide for telecom hardware companies will drive industry consolidation and EMKR is a prime acquisition target.

The optical industry suffers from being structurally flawed, burdened with excess capacity and too much competition. The industry competition has continuously driven down ASPs resulting in limited profitability, no leverage on R&D investments and duplicative corporate expenses. And up until now the industry has lacked a leading consolidator. JDSU CCOP will be an aggressive and opportunistic industry consolidator, which will have the domino effect of requiring FNSR, OPLK and IIVI to also become consolidators.

Valuation

EMKR sum-of-the-parts analysis is a two-step approach, with CATV and PV receiving one multiple and  ITLA assets all receiving their own valuation. EMKR’s industry-leading 100G ITLAs makes it a leading acquisition target. The ITLA business is estimated at FY 15 revenue estimate of $54MM, which could trade at 2x sales which equates to $3.52/share. The acquisition valuation multiples have been in the range of 0.75x-2x in the last few years with 100G technologies at the high-end of the valuation range. FY 15 CATV and PV revenues are estimated at $144MM and these stable and growing assets will trade more in the 0.75x revenues range which equates to $3.50 per share with an overall valuation of $7.00 a share.  A steady increase of new buyers for coveted and scarce assets will only push up the multiples as the industry consolidation picks up.

Becker Drapkin

Activist investment management firm Becker Drapkin is now the largest shareholder with a 10.4% stake. On December 4, 2013 EMKR announced the appointments of Steven Becker, Stephen Domenik and Gerald Fine to its board of directors. The last time Becker Drapkin purchased 106,108 shares at $4.77 on December 6, 2013. Historically, Becker Drapkin has identified undervalued technology companies and the outcome has resulted in improved operating performance and highly focused on creating shareholder value.

Q3 Report

On August 7, 2013 EMKR reported solid Q3 sales of $44.6MM and EPS of ($0.05); both were above consensus estimates and PV backlog increased 37% quarter-over-quarter to a record $70.5MM. Q3 EBITDA was a positive $300K, cash of $18.2MM and debt of $20.9MM. Breakeven for EMKR is $46MM-$48MM. Q4 guidance is expected to be flat to slightly down as Q4 is historically a lumpy quarter and hard to predict.

Catalyst