Cordless Potential

10/22/2004 12:00 am EST


For in-depth and insightful commentary on the wireless communications sector, Nikhil Hutheesing has no peer. Here, the editor of The Forbes Wireless Report offers an analysis of the leading player in cordless phones and discusses advances in the cordless market.

"If you have a cordless phone in your home, chances are the chips inside come from DSP Group (DSPG NASDAQ), which has a 75% market share in the cordless phone business. DSP is headquartered in Santa Clara, Calif. but has most of its operations in Herzelia, Israel. The firm is creating sophisticated chips that will make cordless phones even more advanced technologically than cell phones. Thus its importance as a home appliance will grow. Cordless phones offer better sound quality than cellular phones, and are on the cusp of offering video on their screens, polyphonic ring tones, while acting as security monitors for your home.

"The cordless phone has come a long way over the years. You can turn your handsets into walkie-talkies or romm monitors. DSP recently rewrote some software code on its chips for Panasonic so that its cordless phones could offer talking caller ID as opposed to just presenting the number on a screen. It rewrote its software for Uniden so that its cordless phones could offer polyphonic rings—so that one kind of ring can be reserved for calls from Mom, and another kind of ring for calls from the office. Making such changes costs the company very little, but consumers are willing to pay significantly more for the extra features.

"Now, DSP Group is taking two big steps to increase its business substantially. In the first half of 2005, Panasonic will launch a new product—a cordless video phone powered by DSP Group’s chips. It could be a huge win for both companies. Using Bluetooth technology, the signal carries about 30 feet from the base; Bluetooth technology carries to a range of about 30 feet. You will also be able to connect it to your cell phone. It could also be used for security. And by installing a Bluetooth-enabled security camera outside your front door, you will be able to look at the screen on your cordless phone to see who is knocking on your door. This could be a breakthrough product for the industry. Meanwhile, perhaps a far bigger opportunity is that the company is entering Europe in 2005 - Europe, where about 35 million new cordless phones are sold each year and 95% of them are digital phones.

"Shares of DSP Group climbed 86% in 2003, reaching a high of $28 in September 2003. However, over the past 9 months the stock has fallen 32%. At these levels, shares of DSPG are very attractive. DSPG is also a cash machine. The company has cash and marketable securities of about $11 per share, with no long term debt. Management announced in early August that it repurchased 1,044,000 shares of its common stock in July at an average price of $20.53 per share. The company still has 1.7 million shares available for repurchase under the current repurchase program. DSP Group is a pure-play on the cordless telephone business. With its strong balance sheet and fundamentals, the shares are cheap at current levels. I have a price target of $30 within the next 12 months. "

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