Conexant Risks Priced In

Conexant Systems, Inc. (CNXT - Snapshot Report) reported Q3:FY08 revenues of $171.1 million and non-GAAP EPS of $0.04, which included results from the Broadband Media Processing segment (BMP). Excluding BMP, CNXT reported $115.6 million in revenues and $0.12 in non-GAAP EPS.

Before the earnings announcement, Conexant closed the deal for SigmaTel's Multi-Function Printer unit, which it purchased for $16 million and the Company expects the BMP divestiture to NXP to close in August. The Company highlighted new products and design wins in its main two market segments, Broadband Access and Imaging and PC Media as the building blocks to assembling the new Conexant into a more profitable enterprise.

The addressable market for these products is believed to currently exceed $3 billion and expected to continue to grow representing attractive target markets. FY2008 appears to be a period of consolidation and recovery for CNXT. While OEMs remain cautious, leading to reduced visibility and a strong turn environment, and while inventories at EMS and at IC suppliers remain high, we think near-term dynamics for semiconductor stocks will continue to be favorable.

The management continues to evolve the new Conexant and believe they are getting to the final stages. However, we would like to get more comfortable with the direction of the company and further confidence in the sustainability of recent results. We would also like additional time for management to address the balance sheet and fine-tune the model, which we believe could potentially deliver some attractive EPS leverage.

As a result, we are maintaining our Hold rating with a target price of $6.00, which is roughly 16.2x times our FY2008 EPS estimate and 8.8x our FY2009 EPS estimate. This valuation implies a discount to the median and mean multiple of its peers and adequately reflects current liquidity and industry risks.

Read the full analyst report on CNXT