Semtech Corporation (SMTC)

We maintain our Buy rating on the shares of Semtech Corporation (SMTC), a fabless supplier of analog and mixed signal semiconductor devices. July quarter revenue was in-line with consensus estimates, while the EPS exceeded.

Shares of Semtech are currently trading at a 15.6x multiple of price to our current 2009 earnings estimate (P/E). The healthy pipeline and robust design win activity are encouraging. The backlog increased again in the last quarter, with lead times stretching out a bit. The margin story surrounding the stock is regarding its power management product line. The new power management products will raise the segment gross margin to within the long-term targeted range.

Therefore, cash flow is likely to strengthen. While the Reynosa fire will result in weaker results for the power discrete product line, the net impact on overall results is not expected to be too great. Although the macro situation in the U.S. was expected to impact consumer spending, the consumer segment grew very strongly in the last quarter, and management expects continued growth in Q3. We expect the shares to trade higher within the next six months.