On Consumer Electronics’ Cutting Edge

03/14/2007 12:00 am EST

Focus:

Michael Murphy

Former Editor, New World Investor

Michael Murphy, editor of New World Investor, recommends two companies that are deeply involved in high-definition and other advanced television technologies.

By the time the 2007 holiday season is over, there will be over 100 million high-definition, flat-screen TVs installed around the world. By the end of 2008, that number could double as we approach the February 15, 2009 deadline when the analog signal goes dark.

The growth in the demand for high-definition TVs is definitely going to benefit Silicon Image (NASDAQ: SIMG). Not only are their [High Definition Multimedia Interface]-HDMI--connections built into every new TV, but all the gear that has to connect together in the consumer's living room-[DVD players], TiVOs, media centers, PCs--also needs an HDMI connection.

Consumers are not going to buy this stuff if they have to plug in 24 RCA jacks to make everything work. One wire carrying voice, video and data from device to device with no loss of quality is the solution, and that describes HDMI. Over 500 consumer electronics companies have signed on to the standard, and the volumes are huge. SIMG is a great Top Buy at [a recent price above $8] and all the way up to $13 for my $20 target.

Also last week Norway's Tandberg Television recommended that shareholders accept LM Ericsson's $17-per-share takeover bid for the company. Ericsson outbid US-based Arris Group by more than 10%. Ericsson wants to be a leader in Internet Protocol Television, or IPTV, to homes, laptops, cell phones or whatever. Tandberg was the leader in MPEG-4 equipment for high-definition TV, until the market got real and Harmonic (NASDAQ: HLIT) introduced better products.

Arris now has $1 billion in acquisition credit lines and no head-end (broadcaster, cable office, or telephone company office) equipment, and the same is true of at least five other companies that need to be in this product area. So, that means there are six potential buyout customers and only one independent head-end equipment company of any real size: Harmonic.

At the same valuation as Tandberg, in a buyout situation Harmonic stock would go for $15.13 to $16.34. That's an easy target, because Harmonic is worth more based on its newer products and because it would be the last chance anyone got to buy an IPTV and high-definition head-end equipment company with significant market share. This could get interesting. I am raising the HLIT buy limit again to $10. [The shares changed hands north of $10 early Wednesday-Editor.] The target price remains $16 for this year, and I expect it to go much higher in future years if it isn't bought out.

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