Part 1 | Introduction
Integrated Device Technology (NASDAQ:IDTI) designs, develops, manufactures, and brings to market a broad array of integrated circuits. They serve the following industries:
IDTI products go towards the development of:
- 4G infrastructure
- Network communications
- Cloud datacenters
- Computing power management
- Mobile power management
The company reports two segments:
- Communications and computing
- Consumer and industrial
I will now lay out my case for Integrated Technology, beginning with a succinct thesis.
- Automotive trends: Driverless auto trends suggest the company's technology portfolio will play a big role in future development of automotive technology. Partnerships between big car manufacturers and ride-sharing providers shed light on a big shift on the horizon.
- Acquisitions: Recent acquisitions will unlock great value for investors in the future. The company's operations are on the cutting edge of nanotechnology and efficient wireless charging technologies.
- Operating efficiency: Cash cycle, as of FYE 2015, currently at 52 days. Cycle below periodic average (FYE '06-FYE '15) of 73 days. Decrease driven largely by strategic management of inventory days, in addition to a drop in the receivable collection period.
- Liquidity: Current cash position very strong, without including short-term investments. Long-term debt as a % of current assets at 55% point. IDTI just this past fiscal year (2015) accessed approximately $270 million of long-term debt. Liquidity standing more than solid.
- Solvency: Altman Z-score analysis indicates skillful management. Over the observed ten-year period, the company only seriously faced bankruptcy once: during the 2007 fiscal year. Market capitalization dropped, leading towards a negative value. Other than this black swan, its solvency gets very high marks.
- Valuation: Graham Analysis shows a potentially down trending price point. However, I do consider this trend without taking into accounting past earnings growth. Over the '07-'15 FY range, the company grew its earnings on a per share basis by an annual average rate of ~35%. Simultaneously, shares outstanding show no significant decline over the same period, which indicates a low probability of accounting manipulation. Lots of companies use buybacks as a way of inflating per share figures.
Based on my analysis, I recommend a BUY with an expected horizon of 15-18 months and an ending price range of $30-35. Its current P/E of ~16x is not exorbitantly high. Thus, room to run remains. I recommend further due diligence for those seriously considering purchase.
A fellow Seeking Alpha contributor, Austin Bitzas, wrote a piece back in April which briefly focused on a reliance on the CEO's expertise as a driving force behind the company's future growth. This could potentially present a significant risk if the CEO left or any other incident occurred in which IDTI lost its CEO.
He further claimed that a saturation of optimism tracked the stock. I will show in this piece how past performance demonstrates savvy across all management levels; something certainly not purely reliant on one officer.
Furthermore, I will lay forward some trends, particularly in the driverless auto segment, which may catapult IDTI investors towards new and financially compensating heights.
Part 2 | Catalysts for Future Growth
These current Uber-offered vehicles still maintain an Uber representative to ensure the safety of the ride and ensure data collection gets the extra kick that technology cannot provide. However, these vehicles are very well on their way to becoming a much more frequent reality replicated across myriad cities around the world. These new technologies greatly upset drivers who work for Uber, as evidence by recent warnings from independently unionized drivers in New York City.
Moreover, General Motors (NYSE:GM) invested half a billion USD at the beginning of this year in Lyft (Private:LYFT), in addition to pledging expertise to the ride-hailing company in developing a similar platform as the one Uber recently began offering in Pittsburgh. GM's investment came as part of Lyft's 1 billion USD fundraising round closed late last year.
The Detroit-based automaker's effort to diversify away from a very cyclical business certainly makes sense. Besides just cleaning up house after the Great Recession, many of the automakers sought to invest their resources into business that could hedge downturns. Ride-hailing apps, based on the convenience of the service they provide, would fare much better under a cyclical downturn.
It's much easier to convince the consumer to spend some odd dollars on a ride for X number of days a month as opposed to dropping tens of thousands of dollars on cars or committing contractually to financing agreements that could put them underwater in certain conditions. The entry cost to the automaker's traditional product is just too high during times of oversupply or cyclical downturn. I, for one, see transactions such as the GM one as opportune and strategic investments. The synergies will benefit all parties involved, for now at least.
Earlier this year, back in May, Toyota (NYSE:TM) and Uber formed a strategic partnership, where the Japanese invested in a small stake of the ride-hailing company, in addition to pledging financing capabilities for the company's independent drivers. Yet again, this demonstrates a pronounced and emerging trend in driverless capital investment across a large board. Further, this investment will more likely than not yield results in a shorter time than previous ground-breaking automotive technologies could.
Now that I provided some context, we now delve towards IDTI's own fiscal performance and positioning.
- Synkera Technologies | September 2016
- Zentrum Mikroelektronik Dresden AG (ZMDI) | October 2015
IDTI very recently acquired Synkera for an undisclosed sum. IDTI acquired ZMDI with a $310 million cash consideration.
Synkera Technologies develops, manufactures, and markets devices which use nanotechnology.
It offers a wide range of products, including, but not limited to:
- Chemical sensing and analysis
- Ceramic membranes and filters
Very succinctly put, Synkera provides nanowires and nanorods, in addition to nanodots and nanoelectrodes. I found something very much of particular interest while doing my research: some of the company's offerings include devices which aid in solar energy conversion. Synkera's products, in particular nanowires and nanorods, provide plasmonic resonance that is converted to an electrical current.
This expertise will be valuable going forward, in particular in the charging of wireless mobile charging stations and devices. As less people worry about driving, they will likely increase their personal technology use during the ride. That will necessitate lots of energy. Where will that energy come from? The sun.
Certainly an interesting and eye-catching acquisition. Something to certainly keep an eye out for in the future as synergies materialize.
ZMDI offered state-of-the-art innovations used in automotive, industrial electronics, medical technology, and infrared interfaces. Infrared interfaces refer to wireless infrared communications. These communications are implemented in devices like mobile phones, laptops, cameras, printers, and medical devices. Infrared communications facilitate a very low bit error rate, which makes the technology supremely efficient.
The company's application-specific standard products provide customers with very low energy consumption, making it very attractive.
This particular acquisition gives IDTI significant footing in the automotive industry, as ZMDI maintained supremacy across the sector for numerous years.
IDTI's Advanced Timing products greatly benefit from ZMDI's signal conditioning products. ZMDI products provide a clean and comprehensive interface between microcontrollers and analog components.
The fusion of the two companies will give intelligent systems surrounding awareness and give them adjustment capabilities, which will permit automatic management of system performance, timing, and power management.
This acquisition, combined with the most recent one, will give IDTI tremendous prowess in the driverless auto segment. Investors and readers alike should keep a very watchful eye on how these two plays pan out. They will more likely than not determine the future prospects for the company's growth.
Part 3 | Select Financial Analysis
I first focused on IDTI's operating efficiency. I choose the cash cycle in addition to asset turnover days when doing my efficiency analysis.
I noted two very significant findings:
- First, an above-average cash cycle when compared to the observed period.
- Second, a significant increase in asset efficiency. The company significantly decreased its asset days from 900 towards the ~500 level.
The exhibit below breaks down the cash cycle and includes historical asset days.
Exhibit 01 | Historical Cash and Total Asset Cycle (FYE '06-'15)
Asset days gives the most promising outlook, combined with a below-average cash cycle.
IDTI went from turning its assets in a little under three years during the 2006 fiscal year to approximately one and three quarters of a year ending in the 2015 fiscal year. Improved asset management gives investors peace of mind when sleeping at night, as the company doesn't risk insolvency via ineffective operation management.
Historically, the cash recent cash cycle stood at 52 days, compared to an average of ~80 during the observed period. Overall, the trend since 2011 indicates a drop in the number of days the company takes to take each dollar to the bank.
Going forward, investors and potential investors alike must look out for an increase in both cash cycle and asset days. Both general stability and/or a drop in the number of days signal further fiscal prudence. On the flip side, a rise or volatility within the cash cycle should raise a red flag or two.
Consequently, further due diligence remains important when deciding on the quality of IDTI's operations.
Liquidity & Solvency Analysis
I took a look at IDTI's historical liquidity breakdown for the past ten fiscal years and conducted an Altman Z-Score bankruptcy analysis.
On the liquidity side, I noticed greatly improved cash levels along with a more than manageable debt service.
On the solvency side, I found a company with a strong historical track record of solvency. Only one year, which occurred during the financial crisis, brought about serious going concern risk.
The next two exhibits provide further detail on the matter.
Exhibit 2 breaks down historical liquidity positioning for IDTI during the below-illustrated period.
Exhibit 02 | Historical Liquidity Analysis (FYE '06-'15)
¹Excludes short-term investments
² Includes short-term investments, vs. previous line which contains cash only
Between the 2015 and 2014 fiscal years, IDTI took on approximately 275 million USD in debt. Further, its cash positioning rose significantly simultaneously.
Long-term debt as a percentage of cash, excluding short-term investments, stood at 135% during the 2015 FYE. Including these investments, the ratio drops to 77.4%. While one may find temptation to attribute the increase in cash to an influx of cash resulting from access to debt, the sizable short-term investment position that IDTI maintains says otherwise. Short-term investments contribute an approximate 60% reduction of the long-term debt to cash position. Thus, even if the company went on an acquisition spree, which it has not this year, the positioning should not raise concerns of accounting manipulation.
My further and final point regarding the matter above is this: IDTI acquired ZMDI during the 2015 FYE. Thus, the balance sheet figures from above represent a post-acquisition figure.
The next exhibit displays my historical Altman-Z score results in addition to the relative positioning of IDTI when compared to any potential bankruptcy scenario.
I provide ratios that use current assets and total assets as well, for the reader's convenience. Not much to discuss there that would add any further insight.
The second part of this section deals with bankruptcy analysis, proxies using the Altman Z-score Model. Before I begin, I explain the thresholds I use for my analysis.
Before I move forward, I note: the Altman Z-score Model uses 2.6 as a threshold for being in the clear. In other words, between 1.1 and 2.6, a bankruptcy "grey" area exists. Being in the green, above 2.6, means the lowest potential relative bankruptcy risk. This demonstrates a conservative approach to my analysis.
Exhibit 03 | Historical Bankruptcy Risk Analysis (FYE '06-'15)
The Altman Z-score represents an indexed method of determining the risk of bankruptcy for any given company (except financial institutions). The model takes into consideration five variables and weighs them by predetermined constants. The product of each respective variable and constant is then summed up to come up with a final score. Constants below are in bold:
- Working capital / Total assets | 1.2
- Retained earnings / Total assets | 1.4
- Operating income (EBIT) / Total assets | 3.3
- Market capitalization / Book value of total liabilities | 0.6
- Revenue / Total assets | 1.0
The most revealing point to come out of the above illustrations is how very little risk bankruptcy poses for IDTI. Save for 2008, which was a very tumultuous and rare occurrence, the company faced no bankruptcy risk.
While the most current (FYE 2015) Z-score shows us that the company lies below the normal periodic average, the score is still sufficiently high to allay most of the concern.
Further, I note that I used the highest score as a threshold, which signifies points to a conservative analysis. The % of threshold number is based on the 2.6 number.
Not much discussion remains in this section, but I wanted to give investors and readers alike an opportunity to see historical bankruptcy risk for IDTI.
The final section of this article focuses on the historical valuation for IDTI using the Graham Model. Exhibit 4 illustrates my findings.
Exhibit 04 | Historical Graham Number Trends (FYE '06-'15)
IDTI maintains a rather low P/E multiple, around 17 to be exact.
As of June 2016, the company's book value per share stood at $5.30. Currently, the stock trades at $21.00. Trailing twelve months EPS during June 2016 stood at $1.22, slightly below 2015 FYE EPS.
What this all tells us is that the current share price as a % of the approximate current Graham number stands at around 150%. This would demonstrate an overvaluation on the part of the model, which it certainly does.
However, when using a Graham Analysis, one must very importantly take into account past earnings growth. Average annual earnings growth between FYE 2007 and 2015 was ~35%. This shows that the Graham model framework actually significantly undervalues the stock.
How so? Well, earnings growth of 10% or more means the model undervalues the stock.
Based on the above, I would say an IDTI buying opportunity is ripe. It may get more expensive and less lucrative in the future if the stock picks up.
In summation, valuation should not pose a significant barrier to entry for the purchase of IDTI stock.
Past savvy and future trends give IDTI a great edge. Based on current figures, the company seems relatively undervalued. Moreover, based on past performance, a premium certainly is of merit.
This is a small-cap stock with great growth potential and many future technological spoils.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.