Integrated Device Technology: Volatile Stock With Promising Growth

Integrated Device Technology, Inc. (IDTI) knows about integrating devices. IDT offers some 1,300 high-performance semiconductors and modules, available in 15,000 configurations, primarily for the networking and communications markets, but also for other computer and computer peripheral applications.

Much of IDT's sales come from its communications and high-performance logic products, which include processors, specialized memories, logic and clock management products, and chipsets and controllers for networking gear. The company's top customer, which counts for more than 20% of sales, is networking giant Cisco Systems (CSCO). Distributor Avnet (AVT) accounts for about 13% of sales.

Analysts are looking for IDTI's earnings to double this year, to 85-90 cents a share, up from 43 cents a year ago (fiscal year ends in March 2007). Earlier estimates had been higher but with stock option expenses factored in, EPS were brought down to these lower levels. One of the big reasons for the large earnings improvement expectation: Sony's (SNE) Playstation 3, coming later this year.

Playstation 3 uses IDTI's silicon, and it should be a big hit this Christmas. Take that demand and add still strong orders for IDTI's advanced memory buffer [AMB] products and you can see why analysts are looking forward to better numbers. While AMB is currently enjoying strong demand, watch for a new, competing product called dual in-line memory module [DIMM] to start taking some market share.

The financial picture here looks good. There is very little long term debt (less than 1% of capital). Current assets outnumber current liabilities by more than 3 to 1 with a large cash position of over $500 million. Other numbers: Return on equity is expected to be 8.3% this year, up from 3.7% last year.

Net profit margin is estimated to be 21.7% this year, well above last year's 12.9%. Look for revenues to grow, on average, 9.5% a year over the next 5 years while earnings rack up 28% a year, on average, in the same time period. Research & Development, the genesis of all new products, is 24% of sales. Overseas revenues represent 74% of all sales.

So that's the good news. There are some red flags, especially for risk-averse investors. This is a volatile stock, carrying a Beta of 1.75. That means the stock price has moved 75% more (in both up and down markets) than the Standard & Poor's 500 index in the last 12 months. The stock once traded at $104 a share (2000) before bottoming out at $6.70 in 2002. The valuation is rather high with the stock carrying a price to earnings ratio of more than 20. Also, the new competition coming from DIMM could force prices downward on AMB products, hurting margins.

With all the cash IDTI is sitting on, look for an acquisition or two in the next year. It recently bought Sigmatels' PC audio business for $72 million. The company is probably out shopping for more. Another possibility: a stock buy back or initiation of a dividend. While neither has been proposed by management, at least publicly, many companies with a large cash cushion sometimes use it for both activities.

If you're looking for a semiconductor investment, check out IDTI. It is experiencing explosive earnings growth and has a strong financial position. Watch out for the volatility, though. It could be a bouncy ride.

Disclosure: Author has no position in IDTI

IDTI 1-yr chart: