Wednesday, May 14, 2008

Night before earnings

Twas the night before earnings, when all through the market
Not a creature was stirring, not even a short;

The preannouncement was delivered by the company with care,
In hopes that the bull will be there;

The longs were nestled all snug in their beds;
While visions of large gains danced in their heads........


Most of the shareholders are focused on the recent stock run and tomorrow's earnings (as they should). However, I want to discuss valuation to remind people how "cheap" the stock is. The company went into a strategic alternative study in 2006 because it decided it was undervalued. The stock went form $6-7 to $10-11. Is the company better off now? Definitely. Significantly better. The market cap of $550m doesn't reflect a company that is the leader in iptv in multiple major countries. It doesn't reflect a company with net cash that is half the market cap. It doesn't reflect a company that has been investing heavily in their core technologies and competing and winning against companies 10, 20, 50x larger than they are.

Tonight, there is an article about Ericsson earmarking $25 Billion in R&D over the next 5 years.

"Speaking at Ericsson’s Capital Markets Day event today, executive vice president and CFO Hans Vestberg said that in the first quarter of this year Ericsson focused R&D efforts on LTE, IPTV, and Ericsson mobile platforms. Ericsson’s R&D spend for the first quarter was $1.4 billion, which is up 30 percent from the company’s first quarter 2007 R&D expense of $1.07 billion."

UT spends about $40m/quarter compared to Ericsson's $1.4 billion. And UTStarcom has an end to end iptv system. That compares to other iptv system that require 5 or 6 companies scrapping together different components. In the long term, UT will get bought in my opinion. The company can compete due to spending a good chunk of their PAS profits over the years and will do well as the iptv, broadband, ngn, and pcd units ramp.

With literally billions in revenue up for grabs, UT will become more and more an ideal target for other companies. Countries that do not have home grown infrastructure companies like Brazil, India, etc could even "buy" the company just for the technology.

Anyway, just some thoughts on valuation before tomorrow's call. Good night everyone and pleasant dreams :-)

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