Morgan Stanley Hikes Atmel Target To $12, Notes 'Strategic Value' In Shares

In a report published Wednesday, Morgan Stanley analyst Craig Hettenbach maintained an Overweight rating on Atmel Corporation ATML, while raising the price target from $9 to $12 to better reflect the company's "strategic value." "Atmel has reduced costs this year to offset a drop in legacy sales and sensor hub. That said, the company's spending on SG&A is still considerably above peers at 19% of sales (including stock-based comp) vs. 13.5%. As the company's revenue growth improves (with help of lapping legacy sales hit and buoyed by growth in 32-bit MCUs and connectivity), we expect to see attractive operating leverage in the model," analyst Craig Hettenbach wrote. The recent semi mergers – Avago Technologies Ltd AVGO with LSI Corp LSI, TriQuint Semiconductor TQNT with RF Micro Devices, Inc. RFMD and Cypress Semiconductor Corporation CY with Spansion Inc. CODE – have outlined substantial opex, which makes a case for scale and operational efficiencies. Hettenbach added, "…any M&A involving Atmel theoretically could accelerate the company's path to higher margins. For instance, we estimate SG&A as a % of sales could be reduced by 550 bp, R&D by 80 bp and GM improved by 250 bp, netting to $0.27 in incremental EPS power in the model. This would take our Non-GAAP EPS estimate of $0.65 in CY16 to $0.92." "While tempting to move to the sidelines after the sharp rally in ATML, we remain Overweight as increasing M&A in semis sheds favorable light on the company's MCU franchise and IoT assets. We see an attractive skew in potential stock returns, with an upside to downside ratio of 2:1," Hettenbach said.