William Blair & Company analyst Ralph Schackart released a note to clients on prospects for digital audio company DTS Inc. (DTSI) ahead of the general transition to high definition (HD) theater standards. Schackart has an 'outperform' rating on DTSI. Key excerpts:
We reduced our fiscal 2006 revenue estimate slightly to $82.5 million from $84.5 million (down 2.3%)... There is no change to our long-term positive view on DTS (in 2007 and beyond), as it will be a primary beneficiary of the upcoming HD cycle.
We continue to believe DTS’s shares will begin to work in anticipation of its numbers accelerating due to the new HD product cycle. We forecast earnings growth to begin in fourth quarter 2006, with accelerating growth in early fiscal 2007 and more significant acceleration in mid-2007 and beyond.
Because 2006 continues to be a product transition year for the company (and the consumer electronic industry overall), in our view, for short-term-oriented accounts the shares may remain range-bound for the next few quarters, or until more clarity on the HD-consumer reception is better tested. In other words, if consumers flock to upgrade to new HD devices faster than the market is anticipating, this would benefit DTS’s operating results faster than we forecast and the shares could also begin to work faster than we anticipate. Given the current dual-format situation, however, we do not believe this will occur.
For long-term-oriented accounts that want to be early on the DTS HD-cycle play, we recommend building positions (in a fairly illiquid name) in DTS over the next several quarters in front of the HD cycle given fairly reasonable valuation of about 21 times our 2006 pro forma EPS estimate of $0.53 (excluding cash and interest income)...
We believe the HD cycle will be a strong replacement cycle to current-generation DVD and standard-definition products, and we believe DTS will be a much larger enterprise as a result of the HD cycle.
DTSI 1-yr chart: