Dick Davis Publishing features a "Stock of the Day" each trading day, posted by the opening bell. The stock will be chosen by our editors from a Financial Newsletter Network member's current issue.

Friday

“We’ll look back a year and recall our positive take on Exar Corporation (EXAR 8.10 NASDAQ GS) whose shares remain a compelling play on communications and storage equipment market growth. Exar designs chips for the highly competitive serial communications, networking and transmission and storage markets. The company competes with Applied Micro Circuits, Frequency Electronics, Texas Instruments and Integrated Device Technology. Customers include Hewlett-Packard and Tellabs, as well as Nokia. Since we last wrote about Exar, the company has experienced a host of monumental shifts. A few weeks after we purchased the shares for the Buckingham Tech Value Portfolio, the company announced its intention to merge with peer Sipex Corp. to increase scale in existing markets and broaden access to the networking, industrial and high-end consumer markets. Management had high hopes for the combination, expectations that have yet to pan out. In fact, management didn’t even pan out. The company remains in a leaderless transition, while accounting issues related to the deal, having to do with a change in revenue recognition for units shipped to distributors, is still working through the financial statements, resulting in a rather cumbersome mix of GAAP and pro-forma figures until the June quarter ends. Meantime, the merger integration is ongoing, while market fundamentals remain negatively skewed. Plus, weaker-than-expected sales of power management products in the December quarter and a wafer production snafu in China crimped December quarter financials. Commentary on the fiscal third quarter conference call was incrementally positive, as management told a story to which investors seem to have warmed in recent months. Exar hasn’t yet emerged from the woods, but the trees seem to be getting thinner. And the recent announcement of an industry-first wireless Universal Asynchronous Receiver Transmitter, or UART, solution suggests the company didn’t stop innovating along the way. And there are lots of reasons to remain optimistic about a turnaround, starting with the still very well-funded balance sheet. Exar currently maintains about $280 million in cash and near cash net of long-term debt, or about $5.95 per share, representing 75 percent of the current share price. And revenue comparisons going forward should ease with the dénouement of the accounting transition, barring an end-market-related slowdown, pulling the price-to-sales ratio below 1. At the same time, further progress in the Sipex integration and a focus on bringing operating margins to the long-term goal of 20 percent should pull up the bottom line, which the Street expects to reemerge from the red in the current quarter. We currently believe Exar shares are worth $15, using liquidity goal and fundamental goal prices of $14 and $15, respectively.” Mark Mowrey.

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