Murphy's China "Star"

04/02/2004 12:00 am EST


Michael Murphy

Former Editor, New World Investor

How much of your portfolio should be in tech stocks? Michael Murphy, editor of Technology Investor says, "You should have 100% minus your age in tech as a general rule, and even more than that in the current  environment. For those underinvested, here's one of his new buys.

"UTStarcom (UTSI NASDAQ) is a quality tech stock that is a great play on both China and wireless- two areas of high growth. UTStarcom is based in California, but the bulk of their business is in China, Taiwan, and India. Their main technology is the PAS wireless phone system. Unlike your cellular phone, PAS works like a citywide cordless phone. Just imagine if you could take your cordless phone with you all day long, making and receiving calls just as if you were in your living room. It doesn't work outside a city, but in developing countries like China and India, most people don't travel far or frequently.

"UTSI sells the phone systems and handsets to wireless service providers like China Telecom and China Netcom, which then provide the service for about 20% of the cost of cellular. Needless to say, that's a very attractive price point for the masses that need a phone to get into the 21st century. There are 270 million wireless users in China, mostly cellular, and more cell phones than wired phones.

"Interestingly, UTSI took their technology to Taiwan, where everyone over the age of six seems to have a cell phone. But they went to the major employers in Taipei and pointed out that if all the employees had a PAS phone instead of a cell phone, the company's telephone bill could be slashed. It worked, and they are closing in on 500,000 subscribers in a city that most observers thought would eat them alive. They've also just introduced a dual-mode PAS/GSM handset for those who occasionally travel outside the city.

"Next comes India, where the delays and bureaucracy involved in getting a wired phone practically dictate going wireless. China and India are gigantic markets, and the only easy way to invest in both wireless and China is by buying UTSI. In addition to a great market, the company has strong growth, with 2003 revenues up almost 100%, net income up 88%, and earnings per share up 65% to $1.75. I'm looking for $2.35 per share this year, up another 34%.

"The stock sells for a price/earnings ratio of 13.6- well below both its 23% forecasted growth rate and the market averages. They'll also spend about $200 million this year on research and development, as they have a clear path to a 3G wireless system. That's $1.70 a share, which added to earnings gives 'Growth Flow' of $4.05. The Price/Growth Flow ratio is only 7.9, a ridiculously low one-third of the growth rate. That makes UTSI one of the cheapest stocks on our list. It's a volatile stock, but I think it's a solid opportunity. Buy up to $33."

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