The Value in Trends© (ViT) system uses a quantitative approach to screen for value. Then, the trend direction, momentum and condition is analyzed to determine investment entry/exit points. The ViT system produces an efficient overview of the fundamentals and technicals of a company, paving the way for further extensive research into economic conditions, industry dynamics and company specifics.
In their Q4 FY14 results, IDTI announced revenue from continuing operations was $118.6 million, compared with $107.8 million reported in the same period a year earlier. The non-GAAP or adjusted EPS figure of $0.14 beat the expected analyst figure of $0.13 by 7.7%.
Analysts greeted the non-GAAP revenue and earnings beat with enthusiasm. For 2015, the consensus is now $526.7 million in sales with an EPS of $0.69. For 2016, sales are expected to rise to $561.8 million with EPS coming in at $0.76, a 65% increase on the $0.46 EPS figure for FY2014.
With the share price trading at $15.46 as at the end of June, the FY16 EPS estimate has the company trading on a forward P/E of 20.3x. That's not cheap. The forward valuation levels also look stretched elsewhere. FY16 Price/Sales is 4.1x, while Price/Cash Flow and Price/Book are also expensive at 39.6x and 3.5x respectively.
Quantitative Value Analysis
I define value as the combination of an attractive price and quality factors. With regards to price, I look at a range of relative price multiples. Quality is broken down into profitability, health and efficiency analysis.
To examine price, I use the conventional approach of analyzing price multiples. I rank these into deciles with one being the cheapest 10% and 10 indicating the most expensive 10% of companies based on that specific multiple. Then, I backtest the performance of each of these deciles going back over the past 14 years (end December 1999 to end December 2013) to determine whether the company is attractively positioned based on the historical returns. I conducted my tests across the Russell 3,000 index.
- Ev/Ebitda of 26.4x ranks in the ninth decile across the Russell 3,000. Companies in this decile have produced the second lowest annualised returns, 1.9% p/a.
- IDTI is ranked in the ninth P/E decile, with a reading of 38.7x. Historically, this has been the second worst performing decile, with a return of only 2.2%.
- The P/S of 4.7x positions the group in the nin decile. Again, it has been the second worst performing decile with returns of 2.2%.
- With a P/CF ratio of 30.2, the company is ranked in the 9th decile, where companies have produced an annualised return of only 2.1%.
- IDTI ranks in the 6th decile of P/B, with a reading of 3.1. This has been the 6th best performing decile, with a return of 5.3% p/a.
For quality purposes, I first analyze profitability and break down the calculation of Return on Equity through DuPont analysis. The resulting figure for Asset Turnover then measures efficiency while the reading for Leverage is an indication of health. Combined with profit margins, this gives a good overview of company quality. Once again, I rank the components into deciles from 1-10. Then, I backtest the performance of each of these deciles on the Russell 3,000 going back over the past 14 years to determine whether the company is attractively positioned based on the historical returns.
- ROE of 13.0% positions IDTI in the 4th decile. Companies in this bracket were actually the 4th best performing, producing an annualised return of 6.9%.
- The low profit margin of only 0.3% ranks the company in the 8th decile. However, companies in this decile have produced active annualised returns of 10.8%. That's the best performing decile over the time period 2001-13.
- A/T is 0.6, which ranks in the 6th decile. This has also been the 6th best performing, producing an annualised return of 7.4%.
- The leverage reading is low at 1.1, ranking IDTI amongst the lowest 10% across the Russell 3,000. However, this decile has actually been the worst performing over the period tested, producing annualised returns of only 0.8%.
Technical Trend Analysis
I break down the examination of a company's trend into three components:
- Direction of the trend
- Momentum of the trend and;
- Condition of the trend
- Since challenging 52-week lows during the week ending 27 July, 2012, IDTI has been in a strong uptrend. The share price has surged almost 238% in just over 2 years, which sees it back at September 2007 levels.
- There is support at each of the 50-, 100- and 200-week moving averages (NYSE:MA). However, such has been the extent of the price increase in recent years, these support levels are far below the current price of $15.46.
- The 50-week MA is the first level of support, but at $10.97, it is 29% below the current levels. Meanwhile, the 100- and 200-week MAs are presently at $8.95 and $7.71. In saying that, these MAs are all rising.
- Not since February 2004 has momentum, as measured by the weekly moving average convergence divergence (12,26 weekly MACD), been so high.
- The reading broke into positive territory in November 2012 and has not looked back since.
- This strong level of momentum confirms the strength in the trend of IDTI over the past couple of years.
- The key levels to look out for on the RSI chart are 70 and above, which equates to an overbought condition. Meanwhile, a reading of 30 or below reflects an oversold condition.
- The RSI for Integrated Device Technology is 80, reflecting an overbought condition. However, this is not surprising for companies in a strong uptrend.
- What is worth noting is that since the end of May 2014, the share price is also registering as overbought on the longer-term monthly chart. The last time this happened was at the end of November, 1999.
- As investors will be well aware, this was as the dot com bubble was due to explode higher. IDTI surged over 340%.
- The share price remained in overbought territory until September 2000, from where the share price would lose over 93% of its value over the following two and a half years.
Based on quantitative examination of the relative price multiples, IDTI appears expensive. Regardless of whether it's P/E, P/S, P/CF, P/B or Ev/Ebitda, the company is ranked amongst some of the most expensive across the Russell 3,000. Even if analysts FY16 EPS estimates for a 443% rise from FY14 come to fruition, IDTI still trades on FY16 P/E of 20.3x.
While the bears might point to low profit margins as justification for shorting IDTI today, such logic is flawed. Contrary to conventional wisdom, low profit margin companies have a tendency to produce strong returns. The reason being analysts tend to extrapolate current trends and as such, are overly pessimistic when it comes to companies whose profit margins have disappointed in the past.
The primary argument, though, against the bears today relates to the trend in price. Yes, the share price has deviated considerably above the 50-week MA. Yes, the condition of the trend is now overbought on each of the daily, weekly and monthly charts. Nevertheless, such extreme conditions have occurred before so who is to say they can't occur again? The investor who tried to short IDTI in late 1999 as the share price roared upwards into overbought condition was forced quickly to cover losses.
To conclude, IDTI is in a strong uptrend. Investors should not fight the trend on this one. However, once the trend in IDTI bends, whether it be due to economic, market or company specific factors, it could offer investors a strong short opportunity. At the very least, it should be on investors shortlist for further research. I will be watching this one closely and providing updates on my blog. Stay tuned!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.