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Also Cashing in from Technology

12/22/2006 12:00 am EST


John Buckingham

Editor, The Prudent Speculator

Value and technology experts John Buckingham and Mark Mowrey combine the best of both strategies to find undervalued technology stocks with significant profit opportunities. Here, they uncover a company making tremendous headway in the reawakening of the technology industry.

"Integrated Device Technology (IDTI NASDAQ) is set to benefit from the launch of Sony's PlayStation 3, for which the company has provided several timing chips or clocks. It's just one growth factor of many that keep us interested, as its fine balance sheet and still-attractive multiples support our long-term investment thesis.

"Founded in 1980, IDTI is a 'bits and pieces' chip maker that's been gaining momentum as its silicon supports an increasing number of key functions within an expanding array of electronic devices for communications, computing, and consumer electronics. Revenue from these segments comprised 43%, 36%, 14%, and 7%, respectively, of the $667 million total for the first half of fiscal 2007, ended October 1.

"This expansion has come as the company has shifted from a focus on static random access memory (SRAM) chips to markets in which growth potential and technology requirements are higher. Combined with the transition of a greater portion of production to wafer foundries, this has resulted in a correspondingly positive impact on gross margins, anticipated to be 57% this year, compared to the 38%-48% in the 90s.

"In the advanced memory buffers market, IDTI has benefited from Intel's (INTC NASDAQ) recent technological resurgence. Intel's latest series of dual-core chips incorporating IDTI's high-speed memory interfaces enable a greater number of memory boards to be accessed.

"Management estimates this greater complexity could lead to a five-to-six-times improvement in the dollar per memory board sold with IDTI parts in it. Intended for server markets, the newer technologies might be overkill for the average home user. But Intel has also placed greater emphasis on the media side of the motherboard with its Viiv platform, which IDTI supports using the PC audio product line purchased in July from SigmaTel (SGTL NASDAQ).

"For communications, IDTI makes 'network search engines', switching and flow control chips that help networks more efficiently manage data streams. IDTI grew this business 25% in 2005 and expects continued growth of 20-25%, "for years to come," read a CallStreet transcript of a recent Bear Sterns technology conference.

"The stock has had a good run this year, but it remains attractively priced in our book, as IDTI's consistent and growing profits and cash-strong balance sheet ($1.67 per share) draw us to the shares, which according to Reuters Estimates trade at about 15 times the average estimate for fiscal 2007 (ending March 2007) earnings of $1.12."

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