If Apple Is Good for Infineon, And Infineon Is Good for Ceva...

| About: CEVA, Inc. (CEVA)

At least two Israeli companies, of which I am aware and hold in my portfolio tracked by "Globes", have contributed technology to Apple's (NASDAQ:AAPL) new iPhone, like they did with its predecessors and with the iPad. The companies are SanDisk Corporation (Nasdaq:SNDK) and Ceva Inc. (Nasdaq:CEVA); LSE:CVA).

Data storage is on the NAND flash solutions of SanDisk and Toshiba (OTCPK:TOSBF), or on products made by other companies who pay royalties to SanDisk - with the exception of the Intel (NASDAQ:INTC) and Micron (NASDAQ:MU) joint venture, which is apparently in extended talks with SanDisk. Cheaper iPhones will increase the quantity sold, which will raise demand for flash chips.

A well known secret is that Germany's Infineon (IFX) supplies the communications processors for all the iPhones and iPads, and it is also known that those processors are based on Ceva's DSP (digital signal processor) solutions. Ceva earns royalties of $0.05 for each processor sold to Apple. In the past year, Infineon's CEO said that they did not lose a single US customer, and so I conclude that they and Ceva are inside the new iPhones unveiled this week as well.

A figure like $0.05 for every iPhone and iPad is perhaps a sexy headline for investors, but in my opinion the bread and butter that Ceva will get over the next few years will be from the handset industry leader, Nokia (NYSE:NOK), which sells about ten times as many devices as Apple does in a year. For many years Nokia has relied primarily on communications processing solutions, including DSP, provided by Texas Instruments (NYSE:TI). Texas Instruments said recently that it will slowly but surely, by 2012, completely exit that market.

Already last year, Nokia began providing telephones based on communications processors made by Infineon, Broadcom (BRCM), and the European joint venture of ST Microelectronics (NYSE:STM) and Ericsson (NASDAQ:ERIC). All of them are customers of Ceva, and estimates are that about 5% of Nokia's devices sold last year were based on Ceva solutions.

Last week, Nokia announced a series of handsets loaded with applications, but very cheap - under €45 per device - and aimed at developing markets with large populations.Analysts estimate that those new phones are based on Ceva's DSP processors, through the companies mentioned above, and stand to be a major growth engine for royalties to Ceva in the years ahead.

Some estimate that within two years, Ceva will reach market share of 50% in Nokia - compared with forecasts for 20% this year, and the previously mentioned 5% last year. Estimates are that out of forecast total sales of 477 million phones this year, 377 million will be the kind announced last week, with a price tag of several tens of dollars.

It seems sensible to assume that these developments will bring Ceva within 2-3 years to earnings per share of over $1, so that at its current price of around $11.50, it is very cheap compared to its projected growth rate, and taking into account that it has $107 million in the bank. The relatively low price, compared with the potential down the road, is what brought the board in May to announce a share buyback of up to 10% of the company's shares. Taking shares off the market raises earnings per share figures, which will also boost the company on its way to a target of $1 earnings per share.

Getting ISRG through Ultra Clean

This week I am adding to my portfolio a small US company, Ultra Clean Holdings (Nasdaq: UCTT), and taking out Israeli firm RRsat Global Communications Network Ltd. (Nasdaq:RRST).

RRsat is an excellent company in the unique field of satellite broadcasting, which will apparently flourish during the upcoming World Cup in South Africa, but the share performance has been disappointing, both in good and bad markets. Additionally, it pays a high dividend which gets lost in the portfolio managed here.

Ultra Clean specializes in manufacturing and setting up, as a subcontractor, very complicated equipment in the medical and electronics fields. I came across the company because it is building the LCD screen inspection systems for Orbotech's (NASDAQ:ORBK) Shanghai factory.

In its last results, Ultra Clean provided guidance for strong growth with Orbotech in the next two years.In the medical field, Ultra Clean is building the expensive and very complicated systems for surgical robot developer Intuitive Surgical (NASDAQ:ISRG).

On Friday, Jim Cramer recommended seven stocks with very high growth, which are worthy of investment even in the down markets of recent days, and Intuitive Surgical was one of those stocks. With a sales multiple of 11, and a profit multiple of 32, I am not touching Intuitive Surgical. But I believe I get its very strong growth at a super cheap price, through returns on Ultra Clean, which trades at a multiple of less than one on last year's sales, and a 12-month forward EPS of only 7.

Disclosure: Author holds shares as part of his portfolio tracked by "Globes".

Published by Globes [online], Israel business news - www.globes-online.com - on November 17, 2009; Reprinted on Seeking Alpha with permission
© Copyright of Globes Publisher Itonut (1983) Ltd. 2009