Why Shares of MagnaChip Semiconductor Slumped Today

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What happened

Shares of semiconductor manufacturer MagnaChip Semiconductor Corp. (NYSE: MX) slumped on Thursday after the company announced a secondary offering by existing shareholders. A little over 4 million shares are expected to be sold, with the company set to receive no proceeds from the sale. The stock closed on Thursday down about 11.5%.

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So what

MagnaChip announced on Wednesday that shareholders affiliated with Avenue Capital Management II, L.P. intended to offer and sell about 4.09 million shares of the company's common stock. Barclays will be the sole book-running manager and underwriter.

Later Wednesday, MagnaChip disclosed the pricing of the offering. Shares will be offered to the public for $11.10 each, with the offering expected to close on August 15. Shares of MagnaChip closed on Wednesday, prior to the announcement, at $11.80 per share.

MagnaChip stock has surged since the beginning of 2016, nearly doubling. The company has a spotty record of profitability, but the secondary offering price is about 37 times trailing-12-month GAAP earnings.

Now what

MagnaChip had about 39 million diluted shares outstanding at the end of the latest quarter, meaning that the selling shareholders will be dumping more than 10% of all shares onto the market. No reason was given for the sale, although the selling shareholders may just be taking advantage of the rally over the past 20 months. Whether the stock can continue to surge going forward remains to be seen.

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Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.