IPO Analysis: Wintegra Is Small But Solid (WNTG)

| About: Wintegra (WNTG)

Story: Wintegra (WNTG) makes "network access processing semiconductors." Huh? If you are going to get on a network (via WiFi, GSM, WiMax, Ethernet, etc.) some chip somewhere is going to have to do some processing to make that happen. These guys make some of those. As such, they have big competitors (Broadcom, Intel, Cisco, etc.), and their products are almost commodities.

But they have the advantage of being fabless, giving them low overhead, and having pretty good product positioning (WiMax, DSL, 3G chips). We'll let the market tell us whether they are winning or losing.

Company: From their most recent prospectus, it's a 5M share deal, with 3.17M going to the company, so of the ca. $75M deal, they will keep ca. $48M, which as of Q1 2006 is far larger than their total liabilities of $10.2M. So this chunk of change is material for the company, which from 2003-2005 has been growing gross profits at a bit over 100% Y/Y ($7.20M/$3.55M, $15.3M/$7.20M), and has operating expenses that are nearly fixed and below the latest gross revenue ($12.3M, $11.7M, $13.7M 2003-2005). So, they are operating (and net) profitable. Using the latest 2006 Q1 data, gross profits continued to grow Y/Y at over 100% ($5.6M/$2.6M), while operating expenses modestly ramped up by 28% ($4.1M/$3.2M).

In summary, they currently have more cash coming in than they need to spend, and the cash they keep is growing a lot faster than the cash they spend. This is just the kind of model that we like. They are small, but Solid.

Stock: WNTG has not priced yet, but they are shooting for a $14-$16/share target. Annualizing their current quarterly operating income (which given their growth will lowball the estimate) and using the resultant 22.4M outstanding shares gives them a forward projected EPS of $0.27 ($1.521Mx4/22.4M). At the high end of their target price range, that gives them an estimated projected P/E of 60 ($16/$0.27), which is a bit high but not crazy given their growth and my lowball earnings estimate. (Note: 60 is ca. a 3x P/E market multiple, and ca. 75% operating earnings growth (100% gross revenue growth - 28% operating expense growth) is something like 1-5x better than the average competitor - so the target price is not unreasonable). If, on the other hand, we project forward their earnings growth of 100% that gives them a projected EPS of $0.37 ($1.521Mx(1+1.25+1.5+1.75)/22.4M) and a projected P/E of 43.

We'll probably be buying, but as with Himax, there is likely to be no real hurry, and we may wait to see if it dips.

[Disclosure: currently long HIMX]