Integrated Device Technology – Still Expecting Further Gains
Integrated Device Technology (NASDAQ:IDTI) continues to deliver for its shareholders after posting a strong FQ4 report. I alerted Seeking Alpha readers of the company's potential over a year ago when shares were trading at just $10.55. I said that the company would benefit from 4G rollout and its exposure to LTE. As you can see, my thesis proved correct.
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FQ4 results
The company posted EPS of $0.29, which beat expectations by $0.03 and was more than double the $0.14 the company earned last year. Revenues grew 33.5% y/y to $158.35 million. This was $0.48 million higher than the consensus estimate. Operating margins reached 29% and FCF accounted for 27% of revenues on a ttm basis. Gross margins on a non-GAAP basis improved to 62.9% from 61.1% last year. Total revenues for FY15 rose $88 million, or 18%, to $573 million. CEO Gregory Waters said on the earnings call, "we grew our revenue in fiscal year 2015 substantially faster than the industry."
Big potential in wireless charging
Revenues in the wireless charging segment came in at $4.5 million in FQ4. While not a huge number, it's important to consider that this segment only had $1 million in quarterly revenues when I first wrote about IDTI on February 9, 2014.
There's a lot of potential for growth in this segment considering that IDTI's wireless products are now found in wearables, table lamps, smartphones, and intelligent charging pads. IKEA is now using IDTI's products in its tables and lamps. Samsung has integrated the products into its mobile devices. IDTI's new Wireless PowerShare allows one portable device to wirelessly charge another. This is revolutionary technology and was a hit at the Mobile World Congress in Barcelona.
On the company's earnings call, CEO Gregory Waters forecast wireless charging revenues to increase 57% next quarter. That would put sales at $7 million for the quarter.
Look for continued LTE and 4G expansion
A primary market for IDTI is China. As I said in my prior article:
"IDTI is benefiting from the continued rollout of 4G/LTE. IDTI's primary product is its RapidIO product, which is being used by every major OEM in the space. The rollout is still in the early stages and I'd be remiss if we didn't stress the growth potential in China, which desperately needs to upgrade its network to allow for better data transmission."
China's largest carriers just announced tariff cuts which will boost 4G phone sales. Reuters said "the measure is expected to generate a mass migration of customers to 4G contracts." This is good news for IDTI and will help drive sales of IDTI's RapidIO products.
What's most interesting about this is that sales in this segment declined 7% in FQ4 from FQ3. This came as there was a slowdown in China and North American wireless infrastructure spending. With the lowering of China tariffs, I see the sales decline reversing and spending ramping up again. Considering that in FQ4, 46% of total revenues came from wireless infrastructure, a meaningful pickup will move the needle for IDTI.
Shares still attractive
IDTI remains well-managed with a pristine balance sheet. The company has $555 million in cash and no debt. This equates to $3.74 per share in cash. IDTI will return a portion of this to shareholders with its new $300 million share buyback program. Last fiscal year, IDTI spent $79.2 million on share repurchases.
Over the last five years, IDTI has traded at an average P/E multiple of 33.9. Currently, shares are trading at just 19.7x next year's earnings. The average for the industry is 21.6. Considering IDTI's superior margins and revenue and income growth, IDTI deserves to trade at a premium to the industry. Analysts agree with me as well with themedian price target for shares being $25.
For FY17, IDTI is expected to earn $1.25 a share. If IDTI traded in-line with the industry and I put a 21.6 multiple on the stock, I'm looking at a price target of $27. At the rate IDTI continues to perform, I certainly think shares deserve to be trading much higher. With a PEG ratio of just 0.49, I remain bullish and recommend accumulating shares on any pullback.
