While semi stocks are anticipating volatility following Donald Trump's unexpected presidential victory, Microsemi (MSCC) could be among the biggest beneficiaries given its exposure to defense spending, according to industry analysts.
"We think Microsemi will benefit the most given its 20%+ exposure to Aerospace and Defense given Trump's positive stance on the military," wrote RBC Capital Markets analyst Mitch Steves in a Wednesday note.
"If additional dollars are allocated to defense budgets, Microsemi could see an outsized benefit relative to other semiconductor companies with minimal exposure to this end-market," he further said, adding that Microsemi's gross margins for the aerospace and defense segments are above its average margins, clocking in at between 70% to 80% in comparison to the average of 63%.
Aliso Viejo, Calif.-based Microsemi has diversified the range of end-markets it serves over the years, but it still is known for its strong presence in the military end-market, said Raymond James analyst Steve Smigie by phone.
Other chipmakers with exposure to the defense industry include Intersil (ISIL) , Qorvo (QRVO) - Get Report and Infineon Technologies' International Rectifier, Smigie said, adding that Maxim Integrated Products (MXIM) - Get Report also has a decent amount of exposure to the security sector.
"There's some [government] talk about investing more in infrastructure," said Stifel Nicolaus analyst Tore Svanberg by phone, adding that this would benefit semis with exposure to the communication infrastructure and aerospace and defense end-markets.
Shares of Microsemi were up about 3.3% Wednesday afternoon, and have surged 48% year to date.
Long-term, if Trump is serious about building out domestic manufacturing, this could benefit the U.S. chip market since chip firms would build products domestically rather than doing so overseas, Svanberg added.
Skyworks seems to be interested in the PMC-Sierra asset that it lost to Microsemi last year after a bidding war. PMC-Sierra would have boosted Skyworks' footprint in the communications end-market.
A tie-up between Microsemi and Skyworks makes strategic sense, Svanberg said, adding that Skyworks has talked about doing M&A and has plenty of cash with which to pull the trigger. Microsemi also has gross margins of about 62%, much higher than Skyworks' 51%.
At the same time, Microsemi will come with quite a bit of debt which could be a hurdle for a potential bidder, Svanberg acknowledged.
Other semis could step in to look at Microsemi especially as the industry continues to consolidate with low interest rates fueling borrowing.
RBC's Steves wrote in a recent note that Microsemi's high margins, attractive end-markets of defense and communications and current valuation would be attractive to a wide pool of potential buyers, including Texas Instruments (TXN) - Get Report , Broadcom (AVGO) - Get Report and Maxim.