So Long, Spreadtrum

Spreadtrum's (Nasdaq:SPRD) time as a publicly-traded semiconductor company wasn't all that long, and it certainly wasn't always easy, but it looks like it's coming to a happy conclusion for shareholders. Speadtrum announced Friday morning that it had accepted an improved bid from Tsinghua Unigroup and agreed to sell itself for $31 per share in cash.

A Fair Bid...
Not only was Tsinghua's final bid about 10% better than its initial bid, but it represents a takeout price above the company's prior all-time high in late 2011. Spreadtrum is selling itself for about 14 times its trailing EBITDA, only a very slight discount to the mid-teens average of well-known mobile chip companies like Avago (Nasdaq:AVGO), Broadcom (Nasdaq:BRCM), and Qualcomm (Nasdaq:QCOM). Moreover, relative to the company's cash flow growth potential, this was a very reasonable price for the stock.

SEE: What Makes An M&A Deal Work?

… All Things Considered
The reason I include the "all things considered" part is that it really isn't fair to compare Spreadtrum straight-up to these other chip companies. Unlike Avago, Broadcom, and Qualcomm (and Intel (Nasdaq:INTC) to an increasing extent), Spreadtrum doesn't try to develop the most cutting-edge chips for the next top-of-the-line smartphones at Apple (Nasdaq:AAPL) and Samsung.

Spreadtrum doesn't even target what most would consider to be the U.S. mass market for smartphones. Instead, Spreadtrum looks to provide chips for companies building low-end smartphones for emerging markets like China. The difference between these markets is substantial – the ASPs for Qualcomm's most advanced chipsets are within spitting distance of the ASP for some entire phones containing Spreadtrum chips.

That creates a very different set of priorities and goals for Spreadtrum. The emphasis here is on efficient, low-cost manufacturing, scale, and a more bare-bones R&D approach that looks to do more with less. But with nearly 60% share of the TD-SCDMA 3G market and relationships with major phone companies like Samsung, Huawei, HTC, and Lenovo (Nasdaq:LNVGY), it's a model that has worked reasonably well for the company.

Not A Market-Shifting Move
It is worth noting that the acquirer of Spreadtrum, Tsinghua Unigroup, is a state-owned LLC. That could have some interesting ramifications for the huge Chinese phone market (and the development of future standards), although it's not as if state-owned companies haven't been competing alongside more conventional private companies for some time already.

Ultimately, I don't think this deal moves the needle very much outside of China. MediaTek and Spreadtrum had an interesting rivalry going on, and Spreadtrum was conceivably a threat to companies like Marvel (Nasdaq:MRVL) on the very low end, but Spreadtrum knew what it was (and what it wasn't), and didn't seem to have delusions of grandeur. There is still a worthwhile question to ask as to whether companies like Spreadtrum and MediaTek can move into the lower ends of the U.S. market (and start pressuring ASPs), but seeing as how a large majority of Chinese phones are still 2G, it seems more like apples and oranges at this point.

The Bottom Line
If anything, this deal for Spreadtrum offers a reminder as to how few semiconductor deals of any size there have been recently. I doubt this will light the fuse on a new wave of consolidation, but it will be interesting to see if companies start turning to deals to improve their scale and/or leverage follow-on markets. In the meantime, expect companies like Broadcom, Qualcomm, and Intel to keep trying to one-up each other in the premium market while a host of Asia-based companies focus on the sizable unit growth opportunities at the lower end of the market.

Have Declining Aluminum Prices Foiled Alcoa?

The past few years have been turbulent for Alcoa (NYSE:AA) and its shareholders. Amid a volatile stock price and declining aluminum prices, can the company achieve stability in the near term? Let's use our Cheat Sheet investing framework to decide whether Alcoa is an OUTPERFORM, WAIT AND SEE, or STAY AWAY.

C = Catalysts for the Stock's Movement

As one of the world's largest aluminum producers, Alcoa's profitability is largely determined by the price of metal it sells. Aluminum has declined in price for two straight years due to oversupply and a reversal of the decade-long bull market in commodities. A three-month buyer of aluminum pays around $1764, roughly 30 percent less than what the metal traded at two years ago. As a result, Alcoa has struggled to achieve stable profitability. Still, the company's-first quarter earnings were impressive and beat estimates in the first quarter.

CEO Klaus Kleinfeld shut down operations at many of the company's mines and refineries in 2012, hoping that an estimated 12 percent reduction in the company's output would reduce aluminum supply and bolster prices. While Alcoa is one of the top three aluminum producers in the world, it is unclear if this strategy will be effective in producing a sustainable impact on its price. To help hedge itself against depressed aluminum prices, Alcoa has invested in higher-performing operations, such as refining alumina, the oxide that creates aluminum, and Bauxite mining. Specifically, the company has expanded its Bauxite mining operation to Brazil and Russia, where it enjoys higher operating margins due to lower energy costs.

Alcoa has focused on growing its engineered products and solutions division as the global aerospace industry continues to thrive. Sales from the this division increased 24 percent, netting $173 million in revenues and operating at a record quarterly EBITDA margin of 20.9 percent. This division should remain profitable for Alcoa as lightweight aluminum parts are in demand for new automobiles and aircraft; but due to slowing economic growth in China, investors should not expect the division to repeat its record-breaking performance next quarter.

D = Debt-to-Equity Ratio is Moderately High

Alcoa currently has a debt-to-equity ratio of 0.665. While Alcoa has reduced its leverage by some 25 percent since 2009, the company still utilizes too much debt in its capital structure compared to the basic materials industry average. Moreover, Moody's recently downgraded Alcoa's credit rating to Ba1 on May 29. While the company still has a strong cash balance of $1.9 billion, new debt issuance will be more expensive as a result of the downgrade. Alcoa should use cash flows in the future to reduce some of its debt, as higher leverage increases the company's exposure to fluctuations in the price of aluminum.

T = Technicals are Weak

Alcoa is currently trading at around $7.85, below both its 50-day moving average of $8.35 and its 200-day moving average of $8.57. The stock has been volatile in the past year, and it has recently experienced a downtrend as indicated by its trading below its key moving average. From the graph, we can see that $8 has been a support level for the stock. For the past year, the stock has trended back up after hitting this price. Recently, though, the stock has broken through its $8 support level and could trend lower unless it corrects back to this price again.

T = Trends Support the Industry in Which the Company Operates 

The future looks bright for aluminum demand. Emerging aerospace industries in China and India are consuming components produced by Alcoa's engineered products and solutions division. Additionally, automakers are incorporating more aluminum into their vehicles, as the metal is more lightweight and energy-efficient than steel. Slowing economic growth in China, however, may reduce demand from the Chinese construction industry.

Conclusion

Alcoa's profitability in the short term will continue to hurt from the sub-$1,800 aluminum price. Management has mitigated its exposure to aluminum price fluctuations somewhat by focusing on producing high-value parts for the booming aerospace growth in China and India. With most of the global aluminum business operating at a loss, production will decrease, helping restore supply to the equilibrium. When the downtrend in aluminum prices does reverse, Alcoa is positioned well — its operating margins are much better than Chinese competitors like Aluminum Corporation of China (NYSE:ACH).