Description

Thesis:

I am recommending a long position in ANAD 10/15/2009 converts or ANAD common stock, as the company has a sufficiently negative enterprise value, a brand new semiconductor fabrication plant and a new management team with the will to cut costs. If you are able to buy the converts (not likely), they last traded with a ~31% YTM. In a liquidation scenario, I value ANAD as follows:

Add:

·         Cash: $2.06 (100% of book value)

·         Short term investments: $0.07 (50% of book value)

·         AR: $0.29 (50% of book value)

·         Inventory: $0.11 (20% of book)

·         PP&E: $0.17 (10% of net PP&E)

Less

·         Payables: $0.37 (100% of book)

·         Accrued expenses: $0.22 (100% of book)

·         Long term debt: $0.60 (100% of book)

Total: $1.60

The business would be worth at least an additional ~$2.00 if one were to take a previous trough EV/Sales multiple of 0.7x (1998) and apply this consensus trough revenues of ~$191 million. While I think ANAD is in a more precarious position than history, I do think it serves as a starting point valuation in the scenario that the business is an on-going concern, whatever probability you assign to that.

Description:

Anadigics is a value destroying semiconductor designer and manufacturer of power management products for the wireline (set top boxes) and wireless (cellphones) industries. Production mismanagement has resulted in customer loss, customers looking to second source and the miss of a design cycle for a few products (~12-18month design cycle). That said, Anadigic’s intellectual property and manufacturing know-how have value if one believes that minimizing power use will be important with ever-more sophisticated set top boxes and cellphones.

Management

In August of 2008, significant management changes were initiated to address the company’s misexecutions. Giles Delfassy, a Texas Instruments veteran on the board, took the position of interim CEO and has indicated that one of his priorities will be cost cutting. Additionally, a veteran of Intel’s manufacturing operations was brought in to address production problems.

Investment highlights:

·         Cash position: Anadigics has ~$2 in cash and ~$0.14 in auction rate securities.

·         Capex cuts: After finishing a plant in China in 4Q2008, ANAD will cut annual capex to a maintenance level of $5-10million annually versus calendar 2008 capex of ~$62 million.

·         Free cash flow focus: Management intends to maintain positive free cash flow as so far evidenced by their Nov 2008 announcement of a 15% reduction in the workforce.

Risks:

·         Unwillingness to focus on maintain and generating cash.

·         Inability to respond quickly enough to declining revenues.

·         Illiquidity in the convertibles.

Catalyst