Three of the companies in my portfolio, tracked by "Globes" are unveiling their second quarter results this week. First to step up to the plate was printed circuit board maker Eltek (NASDAQ:ELTK), which will be followed after the bell on Thursday by semiconductor company Marvell Technology Group (NASDAQ:MRVL) and IPTV chip maker Sigma Designs Inc. (NASDAQ:SIGM).
After sinking below $1, Eltek has rallied 35% since the beginning of the month to $1.40, a climb-back that signaled that its results would not be the calamity the company was feared it would be when Eltek was languishing at $0.80 at the end of the session on July 31.
As talk of a global recession grows ever more pervasive, Eltek is an interesting choice of investment out of all the much maligned small caps, because of its principal exposure to sectors that remain pretty much immune to recession, such as defense and healthcare. If Eltek swings back to profit within a quarter or two, as a result of its streamlining, or improvement in currency exchange rates coupled with a fresh round of orders from overseas with a higher-than average gross margin, then its current market cap of $10 million will look nonsensical. The company is selling at an annual pace of $45 million, is on the verge of profitability, and has a cutting-edge technology which it uses in the production of flex-rigid boards.
Sigma - ripe for a takeover?
After missing the market expectations two quarters in a row, with its share price crashing from the $73 high to as little as $13, Sigma will face a host of skeptical investors when it reports on Thursday. On the one hand, the share has rallied to $19, but even this gain has failed to dispel the fear, otherwise there would no logical explanation why a growth company in one of the hottest niches at present - IPTV processors - is trading at a twelve-month forward earnings multiple of just 8, the usual multiple for failed banks. The short traders who now hold short positions on half of Sigma's share capital feel it doesn't even deserve this.
In the last two quarters, the short traders were proven right when they attributed Sigma's weakness to the surplus inventory of IPTV- set top boxes with Sigma processors in them that was piling up in the warehouses of telecoms giant AT&T Inc. (NYSE:T). This time round, they are staking their hopes exclusively on the competition, which they believe will send Sigma into a tailspin.
The immediate competition comes from Broadcom Corp. (BRCM), which announced a while back that it would be entering the fledgling IPTV market, although market sources believe it will not have any Microsoft-certified products on the market until next year. Microsoft (NASDAQ:MSFT) software operates 70% of the IPTV set-top boxes now available, and so far Sigma's processors are the only ones to have passed its software compatibility tests.
Last week Sigma found itself with another, far more formidable competitor in the form of Intel Corporation (NASDAQ:INTC). The company announced during the developer forum it hosted last week in San Jose California, that it considered the embedded digital television and Internet content market a strategic target. Sigma's market includes not only IPTV processors, but also DVD players using the new Blu-ray disc format.
In my view, Broadcom, as the king of the market for digital set-top boxes for fixed line and wireless telecommunications, is a bigger threat to Sigma than Intel, since the latter has already shown itself to be a failure in just about everything, save for its range of computer processors. That said, if I was a short trader building an entire position on fierce competition bringing Sigma down, I would be having sleepless nights - but for another reason. Trading volumes in Sigma options have been so large recently, that it may well be a potential takeover target. It should be remembered that with a $490 million market cap, $190 million is cash in the bank and there is no long-term debt.
With everyone and his sister now looking for an entry point to the market for processors for the digital home, it would make more sense to acquire Sigma rather than attempt to kill it. Its expertise, built over many years, long before the acronym IPTV meant anything to anyone, is in video files in MEPG-4 format, the state-of-the art format that powers HD television broadcasts. It is by no means certain that such innovation would be a walk in the park for the engineers at Broadcom, who were due to come out with a product a year ago and have yet to deliver, or at Intel. I feel Sigma could find itself under the patronage of a chip giant at a price far higher than it is today. And it could happen a lot quicker than people expect.
Published originally by Globes [online], Israel business news - www.globes.co.il
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on SeekingAlpha with full permission.