SILC

[David Randolph]

You know I've been considering buying SILC to the Main Portfolio, but yesterday I got to the final conclusion that we really want to invest in this company.

Why?

There are several financial factors, as the very strong revenue and profit growth coupled with an attractive valuation, but another one yesterday served as a catalyst for me to stop being afraid and just buy the stock!

Did you saw how it was hard to enter www.3stocksonfire.org yesterday? That's because there were too many people trying to access the same location of the website at the same time and the server couldn't handle it (there are other factors, like the programming code (Ramsburg is working to solve that, but it may take a while)).

SILC has the right products and services to improve servers, as you can read on their website: http://www.silicom.co.il/pgx.php

The market cap of the company is just $75 M and I estimate net income in 2007 of $6.44 M (it was $2.6 M in 2006, up 97% from 2005 levels). If the stock were to trade at the Networking & Communication Devices industry average earnings multiple, which is 33.6, and if my estimates are met, the stock would close 2007 with a $216 M market cap, and that means a price per share of $42.28.

Over the next updates I'll go through all the charts needed to justify this recommendation, but I need to be more agile to buy stocks. If you want to check their financials and revenue and EPS trends, you can use this powerful link: http://moneycentral.msn.com/investor/invsub/results/statemnt.aspx?Symbol=silc&lstStatement=Income&stmtView=Qtr

Trading Plan:

Buy 6.66% of capital in SILC to the Main Portfolio

(don't put orders on the pre-market or else you'll create an imbalance at the open and put the price up on ourselves. There's not much liquidity, so go easy on the buying action. I recommend buying the stock between $14 and $15, so there's time)

[David Randolph]

Found another catalyst for SILC to grow a lot over the next couple of years, just read this news on their website dated December 18th, 2006:

SILICOM BUILDS MOMENTUM IN EXPLODING WAN OPTIMIZATION MARKET:
ADDITIONAL TWO DESIGN WINS ACHIEVED

(sorry for the caps)

Now consider RVBD and ALLT market caps of $2.2 B and $209 M respectively, and then compare their financials with SILC, and you'll see SILC looks undervalued, considering the very hot sector it is involved.

I'll dig more for the upcoming updates, but you can buy with ease, technically the stock looks like it is making a top (usually that's when the bull trend resumes )

[David Randolph]

I know I recommended buying SILC just yesterday, and I still feel it is a great stock/company.

But if the general market enters a bear market as I think it will, the multiple we'll attach to a stock like SILC will necessarily be lower, say 8 times earnings? To have that type of multiple SILC would have to be a $6.4 stock. I guess at $10, when it closes that gap, could be enough. We'll see about that.

But today I'll take a small 3% loss on SILC, I need to protect capital.

[poppintito]

a break of 12 is a good short

[David Randolph]

SILC came off 9% from my selling point, but I kept studying the stock and I believe the opportunity is too good to waste, it doesn't matter if it is a bull or a bear market.

The following press release is crucial to me:

• Silicom Builds Momentum in Exploding WAN Optimization Market: Additional Two Design Wins Achieved
Business Wire (Mon, Dec 18)

SILC is just a $63 M market cap company playing on a niche and in the company's words, "exploding WAN optimization market". I also enjoy the fact that the company is based in Israel, I think it offers them a global vision and reach.

SILC can rise 10 fold even if there is a bear market. I want it back for good to the Main Portfolio.

[David Randolph]

eggman11 posted the following yesterday:

A little concern about SILC
SILC is also a foreign comapny that does not report a 10K on a quarterly basis.
SILC dilution is a lot better, but not great.
2001- 2005 the share count has been pretty stable, but
in 2006 (Basic not Diluted) it jumps almost 22% from 4,276 to 5,198 based on their 6K.

I know foreign companies will always look cheaper and a better value than their 10K filing peers, but they will always remain cheaper until or if they are fully reporting.  Do you take that into count in your analysis.

Thanks

The explanation for the share count increase is the company's listing on the Tel-Aviv exchange:

«On December 20, 2005 we obtained the approval of the Tel Aviv Stock Exchange, or TASE, for the listing of our shares on TASE. Trading of our shares on TASE commenced on December 27, 2005. Our shares are included in the Tel-Tech index. Our shares continue to be listed on the NASDAQ Capital Market (previously known as the NASDAQ Small-Cap) under the ticker symbol "SILC" (previously "SILCF") See Item 9. "The Offer and Listing -Markets and Share Price History".

In January 2006, we completed an offering and sale of 10,000 units in Israel, composed of 800,000 of our ordinary shares and 400,000 warrants, pursuant to a prospectus filed with the Israeli Securities Authority and TASE. Each warrant sold in the offering is exercisable into one of our ordinary shares until January 31, 2008 at an exercise price in NIS equivalent to $8.64 calculated on the date of exercise of such warrant. The sale of units resulted in net proceeds of approximately $5.7 million. Any exercise of warrants in the future would contribute additional proceeds of up to approximately $3,500,000.»

So, the share count increase happened for quite legitimate reasons, we shouldn't expect further dilution going forward, also because the balance sheet is strong, with a current ratio of 3.72.

As for the company's products, I got this from their latest 20-F file:

«We have developed a line of products for the server networking industry which facilitates interaction between servers, allowing them to communicate with each other through a larger number of ports and with higher performance than their original capabilities. These are powerful products that allow server-based systems to fully exploit the high speed potential of Gigabit Ethernet. The products have either one, two, four or six ports, which plug into the servers between which interaction is facilitated. Our main competitor in this area, Intel, has developed cards which do not cover the full scope of features that our products do. For instance, Intel's products do not offer six ports, nor do they offer Multi Port Fiber LX interfaces. We believe that our expanded feature set coupled with the fact that our products are based on two different industry leader chip sets (Intel and Broadcom), which makes them more compatible with our potential customers' needs, gives us a competitive edge. To the best of our knowledge we are currently the only company offering such a comprehensive range of server networking products.»

These products are part of the WAN optimization trend going on in the World now. There are several studies about this relatively new, in researchers words, "exploding" market, but I still need to review and compare them to make a more definitive case.

The company made $0.20 EPS in Q4 2006, its best quarter ever. There's reason to believe there will be growth in 2007, because the overall WAN optimization market is on fire:

«A variety of respected market surveys and analyst reports are predicting a dramatic increase in revenues from the WAN Optimization appliance sales over the next few years, with one optimistic report even projecting a tenfold growth from 120,000 units in 2006 to 1,120,000 units in 2008. The sector has been characterized by a high level of M&A activity over the past year, and has produced two successful Nasdaq IPOs during the past four months -- Riverbed (Nasdaq:RVBD - News) and Allot (Nasdaq:ALLT - News).»

I'll have to compare RVBD, ALLT and SILC. I want to know if they're competitors and who's got the leading products.

For now we have enough material here to continue holding SILC with strong hands.

[David Randolph]

I've read the profiles and latest news from RVBD and ALLT and although they work in the same industry, they're different companies from SILC.

SILC makes products, the other two offer services.

SILC is a small $66 M market cap company working in one of the hottest sectors around now, the WAN optimization market. There are no analysts covering the stock and that may explain why SILC is trading at 12.6 times 2007 conservatively estimated EPS of $1?

I'll continue holding SILC.

[eggman11]

David,

In a previous post from last week. You mentioned SILC as a potential 10-bagger and were planning to do some more research. Do you still feel this way? and if so, wouldn't be a prime addition to the 3 stocks on fire portfolio.
Maybe you can do a video analysis of SILC today.

Thanks

[David Randolph]

David,

In a previous post from last week. You mentioned SILC as a potential 10-bagger and were planning to do some more research. Do you still feel this way? and if so, wouldn't be a prime addition to the 3 stocks on fire portfolio.
Maybe you can do a video analysis of SILC today.

Thanks

No, I don't think SILC can be a 10 bagger over the next couple of years, but I believe it can be a 2 to 3 bagger. Unfortunately I don't have time now to explain why (I forgot the time change in the US, sorry), but I'll make a more in depth analysis for SILC on tomorrow's update.

I'll continue holding SILC.

[David Randolph]

There are several studies about the WAN optimization market, most of them expecting about a double in revenues from now to 2008, to an overall size of about $600 M.

This is why I don't think SILC can be a 10 bagger, because it would have to have a big chunk of the market, and with competitors like Cisco, Riverbed and many others, I don't see that happening.

Actually SILC says its biggest competitor is Intel, but Intel doesn't have so specific products as SILC does (check SILC products)

SILC is just a $64 M market cap company, and I believe it can triple over the next couple of years, to a size of $192 M, as demand for its products is growing rapidly across the world and the company is already quite profitable, with EPS of $0.20 in Q4 2006.

This play is similar to what HAUP was, the only difference is HAUP's products are expected to become obsolete in the near future, while SILC's products are only starting to get traction now.

I'll continue holding SILC for the long term.

[David Randolph]

I was expecting some more questions on SILC

Today I don't have much time to go further on the fundamental study of SILC, the stock is touching the 50 days SMA support, I'll continue holding it for the long term.

[Garoh]

Hi David

the stock closed below the 50 MA yesterday .. If it keeps touch this support for 2 Or 3 days without a good rebound with nice volume it's gonna be really bad and will most probably close that gup 

but as you said for long term it won't be a problem as long as the company's making good profits

[WallStreetnBio]

It looks like SILC closed above the 50sma. The low volume tells me that the weak hands are out and if you want to buy the stock you have to pay up for it. 

[David Randolph]

Hi David

the stock closed below the 50 MA yesterday .. If it keeps touch this support for 2 Or 3 days without a good rebound with nice volume it's gonna be really bad and will most probably close that gup 

but as you said for long term it won't be a problem as long as the company's making good profits

I guess you're happier now Garoh, as the stock closed above the 50 days SMA. You need to relax and focus on fundamentals, even technicals can't be seen as an exact thing. Look what Livermore had to say about pure technicians:

«I should say that a chart helps those who can read it or rather who can assimilate what they read. The average chart reader, however, is apt to become obsessed with the notion that the dips and peaks and primary and secondary movements are all there is to stock speculation. If he pushes his confidence to its logical limit he is bound to go broke.»

SILC made $0.2 EPS in Q4 2006, and my take is we can realistically expect it to make $1.20 EPS in 2007 (that would be 30 cents a quarter, on average). This should be enough to take the stock towards $24 a share.

Now, what we need to focus on is the company's ability to meet these expectations.

I'll continue holding SILC.

[WallStreetnBio]

Dave can you do a video on SILC when ever you get a chance? Take your time no rush I plan on holding SILC for a couple of years.