A Beating Turns into a Bargain

11/29/2007 12:00 am EST

Focus:

John Buckingham

Editor, The Prudent Speculator

Scouring for bargains, John Buckingham, editor of the Prudent Speculator/TechValue Report, finds much to like about this victim of recent market volatility…

Flat panel display processor maker Trident Microsystems (NASDAQ: TRID), scares us a bit, but that’s more because no one seems to like ‘troubled times’ stories at the moment, even ones with seemingly little potential to become altogether dire. And it’s hard to pass up a bargain entry point into shares in a market leader that investors have left for dead.

We were immediately attracted to Trident shares following a more than 50% slide in October, figuring hypersensitivity to any negative news had led to a more than fair sell-off. With half the stock price matched by cash on the balance sheet, and trailing earnings multiples in the mid single digits even before we excise that cash, the stock seems priced to move.

Within its highly competitive market, Trident is the industry leader. Its share has fallen from the 30% to 35% range in the LCD TV space to an approximate 25% to 26% more recently, due to a shift in overall consumer interest from true high-definition sets, to what’s referred to as WXGA.
 
The former generally cost more, and as LCD technologies and sales channels have gone mass market via ‘club channel’ sales like the big-box stores, the lower tier TVs have represented a greater share of the overall sales. Suffering that shift are the Tier 1 television makers—Trident’s most valued customers—including Philips, Samsung, Sharp, Sony, and Toshiba.

Trident believes the Tier 1 manufacturers will begin approaching the club channel with competitive offerings and the company wants be sure it can support that transition with its quality advantage, superior technology, brand power, and prior relationships. Further, we think we’re in a transitional period, which should produce a more natural spread between low- and high-end pricing and market share, providing decent margins to all participants.

A bit of a waiting game ahead, though. Revenue in the latest quarter came in at $88.2 million, which was below expectations, but higher by 24% on the year. Earnings were $0.38 per share, greater than consensus of $0.32 and up 19% year-over-year.

We don’t want to be too focused on the near-term, as 2009 will be the first year without analog broadcasts in the US, a fact sure to drive increasing demand for flat panel televisions. For sure, most of the new demand will be for the lower-end of the value/quality spectrum—Trident’s current focus. We also expect the company to maintain its leadership on the high end, perhaps being able to fulfill the ‘best of both worlds’ requirements the Tier 1 players have.

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