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Small-Cap Recap: Power Chips


The race is on for smaller power converters.

One the most challenging aspects of designing today's ever smaller and more powerful electronic devices has to do with how to supply them with the stable Direct Current (DC) needed for smooth and reliable operation. As those of you who lug around laptops know, power converters don't lack room for improvement, and there are a handful of small companies, in addition to several divisions of larger ones, whose entire business consists of devising better, smaller and more customizable converters – the proverbial better mouse trap.

The one that has caught my attention is Vicor Corp. (VICR). VICR has devised a new proprietary platform (the V-I Chip) that allows for the miniaturization and easy design-to-suit configuration of power converters. VICR was spotted more than a year ago by our friends at MS Howells. They were intrigued by a deal that VICR had struck to provide converter chips to Sony (SNE) for its new PlayStation console. The chatter was that SNE would incorporate more than one V-I Chip in each PS box. As we know, since then the PS introduction has taken more than a passing detour, and in any event, preparation for mass roll-out of the V-I Chip also took longer than expected.

What came as a pleasant surprise however was that VICR's legacy technology not only did not miss a beat, but actually ramped faster than anyone anticipated; which means that when the V-I Chip roll-out hits full stride, the financial side of things could get really interesting.

But wait, there is more . . . says the infomercial man. Typically, a new product roll-out hurts margins until sales reach a certain critical mass. But VICR is hinting at a far greater role for licensing revenues when it comes to the V-I Chip. The Sony deal for example is based on a license. This of course shifts the manufacturing risks and costs on the customers, dramatically increasing VICR's margins.

There are also intangibles to VICR that might be considered attractive: the CEO and founder owns more than 30% of the outstanding stock and controls 80% of the voting shares. I realize that's a double edge-sword, but my sense is that he is cut from the same mold as Cypress Semi's (CY) T.J. Rodgers: a tech-head with laser focus on his company. Furthermore, in today's environment of 9-figure executive pay-outs, the compensation packages of VICR's top officers – including stock options – are actually sane.

You may be thinking that this sounds like a really good story, and, in my humble opinion, it is. So what's the catch? The catch is that the valuation suggests a lot of the good news is already in the stock.

Relative to its direct stand-alone competitors – Power-One (PWER), Artesyn Technologies (ATSN) (recently acquired by Emerson Electric) and C&D Technologies (CHP), VICR is pretty pricey. Price-to-Sales is about 3.7 vs. a range of 0.50-2.00 for the others, and the P/E is 60x on '06 numbers and 30x '07 estimates. You can see more valuation data for all the various companies here. Thanks to heavy depreciation expenses and NOL carry-forwards, VICR throws off significantly more cash than earnings, and it also has a distinct technological edge on the competition, at least for now. Based on the company's "body language" (VICR does not give guidance), I also believe that current consensus estimates are low. But the valuation is still high. Is there even a buy-out premium permeating this group? There aren't that many players left and there has been quite a bit of take-over activity.

So why am I wasting your time telling you about a stock where the good news seems to be already out? Actually, the reason is obvious: because this is Minyanville, and you, my friends, are Minyans!! You are that rare breed of independent thinkers that can figure out whether a stock like VICR fits your time and risk profile. You know if you get your kicks driving dune-buggies at 100mph in the desert, or if your stock taste is more like a . . . Volvo. And you can figure it all out without dumbing down the process to "triple buys" and "triple sells."

For what it's worth, my cash for VICR is on the sidelines for now. I am "counting" (which unfortunately is just a step above "hoping") on the broader market to deliver some cheaper prices sometime soon, and/or for VICR's chart to revisit some lower support areas. And if VICR keeps on running and I miss out on it . . . (as Toddo would say) "pass the fork please!"
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Position in CY
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