The hand that guides
CEO and President Shaike Orbach is a very smart dude whose been leading the charge for more than a decade. How smart? Check this out.
During Silicom Ltd. (NASDAQ:SILC)’s infancy, Mr. Orbach realized his customers would prefer to deal with a company that’s financially strong. In May 2007, Silicom privately offered 875,000 shares at $20.50 per share raising about $18 million.
17 Months later, the housing bubble burst, the market got crushed, and Silicom traded for $2.87 per share. Whether Mr. Orbach foresaw a market correction or just stumbled upon some luck, the fact is, Silicom had $40 million in cash with a nonsensical market cap of around $20 million. Despite the times, customer confidence was probably as high as it could be.
Fast forward to present day. Silicom Ltd. (NASDAQ:SILC) has grown into a low cost business, with plenty of working capital, and high profit margins. In a very shareholder friendly move, Mr. Orbach decided to issue a dividend of $0.55 per share or $3.9 million payable this past April. Have you ever heard of tech micro-cap doling out that kind of cash?
Now the numbers
Silicom is a serious growth stock with wicked strong financials. It has increased sales 237% and upped its bottom line by 375% over the last 3 years. Its margins are expanding, costs are contracting, and it has over $50 million in cash on the balance sheet.
Taking its cash into consideration and using a conservative $8 million in free cash flow, Silicom Ltd. (NASDAQ:SILC) needs to grow 11% over the next 5 years, then 6% during years 6-10, before settling into inflation for today’s price to be fair. When you factor in time stamping, SETAC, and the fact that it grew its top line by almost 50% last quarter, those targets seem easy to beat.
A word about risk
Silicom is domiciled in Israel so there’s obvious political risk. And while unlikely, management could suddenly lose touch, miss trends, get dropped by customers, and wreck a good thing. But I think the real risk here is a company like Cisco Systems, Inc. (NASDAQ:CSCO) coming along and scooping up Silicom Ltd. (NASDAQ:SILC) during the early stages of its growth cycle. If that were to happen, investors would miss out on years of outperformance and compounded returns.
The bottom line
Hot markets like Virtualization, Cloud, and Security, are where Silicom lives, breaths, and does business. Management has a track record of identifying trends, building well received devices, and cross selling customers. The end result is a financially strong, low cost business, that’s attractively priced with plenty of room to run. For investors, it doesn’t get much better than this.
The article Smooth as SILC originally appeared on Fool.com and is written by Wade Michels.
Wade Michels is long Silicom. The Motley Fool recommends Cisco Systems, F5 Networks, and Riverbed Technology. The Motley Fool owns shares of F5 Networks and Riverbed Technology. Wade is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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