We reiterate our Neutral recommendation on Atmel Corporation (ATML - Analyst Report). The company’s diversified product ranges and incipient buy-back activities are likely to partially neutralize the effects of the weak economic condition and tough competition prevailing in the industry.
Atmel is in the process of converting itself into a complete microcontroller-based company, which it believes will augment its cost structure and unlock value. The company is focusing more on its core microcontroller business through introducing its latest products with the aim of targeting high-growth and high-margin businesses.
Fast-growing touch-sensing technology is one of the major growth drivers for Atmel's microcontroller business. Recently, Ingenico adopted Atmel’s maXTouch services for improving its touchscreen payment portals. The high demand for the company’s latest maXTouch solutions is expected to improve its business in the touch sensing market.
Atmel’s strong associations with Nokia, Motorola, Sharp, Toshiba, HTC, Samsung, NVIDIA and QualComm are expected to boost its performance moving ahead. In addition, with the launch of Microsoft’s latest Windows 8 operating system in the second half of 2012, a new era of touch-enabled tablets, ultrabooks, convertible PCs and all-in-one PCs will emerge. Atmel's leading technology and market position combined with the company’s partnership with Microsoft help the company to be the favored touch supplier in future.
Finally, a healthy cash balance has prompted management to buy back shares, thereby increasing its shareholder value through share repurchase. Year-to-date, under the existing share repurchase program, Atmel has repurchased 15.6 million shares while $166.2 million shares are now available for buy-back. The buying back of common shares is likely to be one of the best strategic moves, which will help enhance investors’ confidence.
Although Atmel’s intent and advances towards meeting long-term goals are impressive, we are, however, concerned about the intensely competitive landscape. With the rise in competition within the industry, the company is witnessing a decline in its product prices, which in turn is detrimental to the company’s overall margins.
Atmel is a globally renowned enterprise generating 82% of its revenue from countries outside the United States. Hence, the company is highly exposed to foreign exchange rate risk. An unfavorable movement in foreign currency exchange rates might adversely affect the company’s top line. Moreover, the high level of inventory remains a huge matter of concern for the company.
Hence, until the situation ameliorates and a brighter picture appears on the scene, we consider it wise to maintain a sideline stance on Atmel. In the short run, we have a Zacks #3 Rank on the stock, which translates into a short-term ‘Hold’ rating.