Communications Supplier Ready to Connect

04/09/2007 12:00 am EST

Focus:

Nikhil Hutheesing, editor of Forbes Wireless Stock Watch, finds a diversified chip maker and communications supplier he believes is poised to move up smartly.

Integrated Device Technologies (NASDAQ: IDTI) is a supplier of chips and other products that form the building blocks of much of today's network and communications infrastructure.

Its highly diversified set of semiconductor products makes it less susceptible to a downturn in any one area, like personal computers. But more than that, it has products that communications providers are going to want because they lead to more efficient use of bandwidth and faster processing of multimedia.  That works well for IDT, since the company has been increasing its exposure to wireless.

[After several years of cutting costs and rationalizing the business], IDT will begin to see a payoff. While third-generation (3G) high-speed wireless networks were slowly deployed in the US, they are now more widespread, and demand and usage have grown significantly.

The final two quarters of 2006 were weak for IDT because of inventory reductions and consolidation, but I think the market will turn in 2007.  China Mobile, for instance, just announced this month that it would build out its long-awaited 3G networks in eight Chinese cities before the 2008 Beijing Olympics.

In the wireless business, IDT makes pre-processing switches for wireless infrastructure and it’s likely that sales for these products will really begin to ramp up in 2008. This business is expected to grow 20% per year once its deployment begins—in about 18 months.

IDT has had a difficult few years, but the company has done an admirable job of repositioning itself. At the same time, it has expanded its product line and reduced costs, paving the way for considerable leverage on the upside.

The shares have been hovering around $15 for about one year now. The stock is languishing in part because Wall Street lumps the company in with others in the semiconductor and wireless- infrastructure business.

The company's fiscal third-quarter 2007 results, which ended December 31, also were disappointing, because of higher R&D expenses. IDT did have strong growth from its computing business, as well as from its PC audio products. The weakness came from the communications market—which I believe will turn around this year.

IDT’s current price/earnings ratio of around 15x forward earnings [is well below its competitors, and its price/earnings-growth ratio of slightly over 1x is attractive]. It has a strong balance sheet with $291 million in cash.

I think it should be priced in line with others in the business at a P/E of 25x. Given my earnings per share estimate for 2007 of 97 cents, I think IDTI is currently worth $25 per share. That represents an increase of 65%, which I think can be achieved within 12 months.

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