Wedbush Morgan analysts Craig Berger and James Schneider sent a note to clients explaining their upgrade of Trident Microsystems (TRID) -- key excerpts:
* We are upgrading shares of TRID from HOLD to BUY given 1) the firm is likely to continue its best-in-class execution in its core analog image processor market, 2) the firm has the best chance among its competitors of successfully garnering significant MPEG decode revenues in 2007, 3) ramping seasonal trends should provide a tailwind to share prices beginning in mid-Q2, and 4) the stock's pullback to 22x our c'2007 EPS estimate now yields +28% upside to our $34 price target.
* There are risks to our upgrade as some would argue the stock is catalyst-light for the next couple months, though we believe ramping seasonality in June will indeed provide a tailwind to share prices. Additionally, the stock could see profit-taking in the near-term following its results last week and after appreciating almost 100% over the past seven months.
* Trident Micro continues its best-in-class execution among the GNSS/PXLW/TRID image processor trio. Given this execution, we believe TRID has the best chance of leveraging this success into significant MPEG decode revenues in 2007, a potential source of further earnings upside.
* We are now waving the green flag on the LCD TV supply chain for 2H'06, updating our 'Heightened LCD TV Risk Profile' note from six weeks ago in which we were concerned about 1) 10 months of flat LCD TV panel prices, 2) rising panel inventories, and 3) weak European demand. With the panel cycle now 'rolling over' to some degree, inducing solid panel price declines, we believe LCD TV prices will be materially lower in time for the 2006 holiday selling season, thus sufficiently stimulating demand to ensure robust TV shipments, a positive for GNSS and TRID.
* No changes to estimates ($1.00 and $1.20 in calendar 2006 and 2007) or our $34 price target. Our $34 target price is based on a 28x multiple of our calendar 2007 EPS estimate, inline with peer O2Micro and a 10% premium to peer Zoran, which we think is justified due to Trident's pure-play business model in the strong secular growth market of ATVs, its stellar execution, and sector-high growth rates.
TRID 1-yr chart: