Hittite Microwave's High Margins

We maintain our Buy rating on the shares of Hittite Microwave Corp. (HITT - Analyst Report). Although the company provided fairly weak guidance for the third quarter, business at HITT remains strong. The company is gaining traction with new product lines, which is driving sales growth, and maintains high margins.

Hittite is currently trading at 17.6x our estimated 2009 EPS of $1.99. Although a premium to its peers on an absolute P/E multiple, its stronger growth rate makes the stock look more attractive with a PEG ratio of 0.6. The company’s track record of growth and strong margins are impressive as it has posted better than 19% growth year-to-date in a fairly lackluster market.

We believe that the stock should trade at a premium to its peers given its stronger IP position and strength in large and growing markets. Given an outlook for lower equity valuations and a slow economy, we cut our six-month price target to $45, which we believe is more realistic by year-end. This target represents a P/E multiple of 22.6, which we believe is very reasonable.

Hittite generated an impressive return on equity (ROE) of 28% for the full year 2007. ROE has declined due to the increased level of equity from its IPO and is forecasted to decline further due to its strong cash generation. This in turn reduces its activity and solvency ratios. The more important component of ROE, net margin, has improved steadily over the past year, which we expect it to maintain at close to 30%, a very healthy rate.

Read the full analyst report on HITT