Digital Theater Systems (DTSI) reported strong 4Q05 earnings on Monday afternoon -- the stock is up nearly 20% since then. The company earned $1.3 million, or 8 cents/share, on $17.9 million in revenue; analysts expected 4 cents/share on $16.9 million. DTSI gave 2006 guidance inline with previous estimates.
William Blair analysts Ralph Schackart and Jon McCumber sent a note to clients following the DTSI earnings report. Key excerpts:
DTS posted a strong quarter.. going forward, we continue to believe investors will begin focusing beyond 2006 numbers and into 2007 through 2010 estimates to gauge the earnings power of the company. Although it is tough to look out to 2010 at this juncture (i.e., many pre-HD cycle uncertainties remain), we believe DTS business model stands the chance to generate around a dollar in EPS in fiscal 2008, or 30%-plus EPS CAGR from 2006-2008 due to its mandatory inclusion in the next DVD cycle...
Hence, although the near-term DVD headwinds may pressure the next few quarters, we believe the stock will likely continue to work in between product cycles given roughly $6 per share in cash, no debt, its continued FCF generation, and a strong HD-product cycle catalyst. Hence, for long-term investors looking to play the HD cycle, we continue to recommend purchasing DTS shares while recognizing the next few quarters may continue to have transitioning noise (i.e. slowing current generation DVD growth).
Furthermore, with the shares trading (over $19 in the after market) at over 25 times our 2006 EPS (ex-cash) and around 12.5 times EV/EBITDA, compared with 26 times our 2006 EPS forecast for Dolby and 15.2 times EV/EBITDA, we believe valuation is reasonable to begin building positions for the HD cycle, especially given the outlook for 30%-plus earnings growth through fiscal 2008 (and potentially beyond).
DTSI 1-yr chart: