Chipmaker Microsemi Corp. (MSCC) earned an upgrade from Goldman Sachs & Co. in part because of a positive sales outlook and its low stock price. However, Goldman's Mark Delaney also raised Microsemi to a buy because of the likelihood that the company could be a target for an acquisition.
Microsemi makes chips for aerospace, defense, communications, data center and industrial customers. Shares of the company gained 1.2% to $47.89 on Thursday, a day after the report. Goldman has a $55 per share target, based on a mix of comparison to peer valuations and M&A likelihood.
The government and other markets could help Microsemi. "The 2018 U.S. defense budget proposal targets a 10% [year-over-year] spending hike," Delaney wrote. The company has also reported strong sales from satellite companies and overseas militaries.
While the outlook has arguably picked up, Microsemi trades at a discount to its peers. Analog Devices Inc. (ADI) - Get Report Broadcom Ltd. (AVGO) - Get Report and Texas Instruments Inc. (TXN) - Get Report trade at 5.4 times, 5.8 times and 5.4 times Goldman's projected calendar-year 2017 sales, which chipmakers have a median multiple of 5.4 times 2017 sales.
Microsemi trades at 4 times 2017 sales, a 25% discount to the group, which could make it an attractive target.
Microsemi's $5.5 billion market cap, and its $6.5 billion enterprise value including debt, make it a modestly sized target for the semiconductor industry.
Last year saw blockbuster chip deals. Avago Technologies Ltd. closed its $37 billion purchase of Broadcom and then took the target's name; Softbank Group Corp. bought ARM Holdings plc for $32 billion; and Western Digital with Sandisk for $19 billion.
Microsemi did not immediately respond to a query.