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InterDigital, Inc. (NASDAQ:IDCC) is basically a R&D outfit specializing in developing cellular and wireless technologies. If you use a cell phone, PDA or tablet, you probably use IDCC technology. The Company is not a manufacturer. Its business model relies upon licensing patented technology to manufacturers such as Nokia (NYSE:NOK) and Samsung (OTC:SSNLF). InterDigital is an early entrant to this industry and has been around for many years. Its technology innovations are found in every area from 2G to the latest 4G and LTE products. The customer base is global, though most manufacturing takes place in Asia. The Company sells its products in dollars so there is little currency risk.

Highlights from the 2Q10 are as follows:

  • Net income of $35 million, or $0.78 per diluted share, a 32 percent increase over 2Q09 EPS of $0.59;
  • Revenue of $91.2 million, a 22 percent increase over 2Q09 sales of $74.9 million;

Looking at the trailing twelve months ending June 30, 2010:

  • EPS of $3.39 as compared to $1.95 in FY09
  • Restated revenues of $359.3 million as compared to $259.3 million in the 12 month period ending 06/09
  • Net income (TTM) of $182.1 million compared to $86 million in FY09
  • Operating margins (TTM) of 51.9 percent, ROE of 92.5 percent and ROA of 19.7%
  • Net margin of 50.7 percent
  • CFROI of 38.17 percent

The Company has a strong balance sheet:

  • As of 2Q10, reported cash and short term investments of $485.8 million
  • Virtually no long term debt but $426.4 million in other long term liabilities
  • Current ratio of 2.9X
  • Liabilities to Assets of 71.9 percent
  • Long term debt to capital 0.1 percent
  • Book value of $6.04 per share and TBV of $3.18
  • Total liabilities to average free cash flow is less than 3X

On a valuation basis, the company looks undervalued.

  • P/E (TTM) is 8.7X and the forward looking P/E to estimated EPS is 9.2X
  • The PEG based on estimated EPS and growth is a low 0.6X
  • Low EV/EBITDA of 4.98X
  • For the FY ending 12/10, four analysts project EPS in the range of $2.83 to $3.44, providing a consensus of $3.22
  • Four analysts also project EPS for FYE 2011. Here, the range is $1.70 to $3.68 with an average of $2.58
  • The June 10 reported earnings was 28 percent higher than analyst consensus forecasts.

The fortunes of IDCC are tied closely with the worldwide market for cellular devices. Handset sales have declined in the recent past but will rebound, we think, with the roll-out of 4G devices. IDCC will benefit from the popularity of tablet computers. The company’s strength lies in not having capital tied-up in inventory or capital equipment. It can use its excess cash to continue the stock repurchase program started in 2009 but suspended -- thus far -- in 2010, provide a dividend, or find an accretive acquisition. It cannot sit on the cash indefinitely; it must do something to increase shareholder value.

IDCC will be releasing its third quarter results at the end of October. It would be prudent to wait until then before prognosticating further.

Disclosure: Author has a long position in IDCC

Source: InterDigital: A Cellular Communications Play