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Rate the company, not the stock

September 29, 2006
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(Israel Business Arena Via Thomson Dialog NewsEdge) Anyone wishing to follow the semiconductor sector on a regular basis, especially the flash market, knows that there is one key figure whose opinions are well worth noting: Citigroup analyst Craig Ellis. However, in the past year, he has been joined by another analyst who is also gaining a reputation as a sector expert: WR Hambrecht & Co. analyst Daniel Amir. While one could hardly compare the two investment houses in terms of size or experience of their analysts, the fact that Ellis and Amir are now classed in the same category is quite definitely an impressive achievement for the Israeli analyst, who joined WR Hambrecht in 2004, and has already become renowned worldwide for his expertise. These are some of Amir's latest recommendations:



1. DSP Group (Nasdaq: DSPG)

Recommendation - Buy

Target Price - $33; premium - 45%

Line of business: DSP Group is a fabless semiconductor company that offers chipset solutions applications for digital telephony, European digital enhanced cordless telecommunications telephony, and Bluetooth systems for voice, data, and video communication in residential, as well as small-office home-office, and small to medium enterprise environment.

DSPG should opt, in future, for large acquisitions, rather the small ones it has made up till now.

Amir: DSP Group focuses on the wireless handset niche and it has a big advantage because it controls 70% of the US market and 10% of the European market, which it entered a year and a half ago. It is a highly profitable company operating in a market that is large enough for one company to succeed, but too small for the big competitors. This field is not growing as fast as cellular handsets. DSP Group has a handsome $353 million in cash, and it generates $15 million revenue a quarter from current operations.

Globes: DSP Group predicts revenue of $227-236 million and growth of 21-26% for 2006. What do you think about this rate? DSG Group's problem is that its sector is not growing rapidly. Revenue rose handsomely, but it's rather hard to get institutions excited about the growth rate, or about the fact that the company works with cordless telephones. All in all, this is nevertheless a wonderful company, with excellent management. The way Wall Street looks at it is not their fault. In any event, I believe that DSP Group should use its cash to expand.

What kind of acquisitions?

I'm not talking about buying small technologies as it has done until now, but buying large companies with revenue, for example in wireless communications or networking, video and image processing. Things that are close to it. If the company learns how to diversify properly, I believe that this will generate more interest in it. DSP Group's share was a great disappointment this year, even though its business was pretty good. Therefore, my target price constitutes a significant premium on the current share price.

Saifun's investors know next year will be critical

2. Saifun Semiconductors Ltd. (Nasdaq:SFUN)

Recommendation: Buy

Target Price - $38; premium - 30%

Line of business: Saifun provides intellectual property solutions for the nonvolatile semiconductor memory market. Its nitride-read-only memory (NROM) technology enables semiconductor manufacturers to double and even quadruple the amount of memory that can be stored on a given area of a processor.

What's the basis for your target price for Saifun?

People investing the company today expect the company to shortly sign a large contract with a data company. If this doesn't happen, investors might be disappointed in the long term, but it's premature to talk about this. I predict that the company will have $100 million in sales next year, and I see no reason for them not to achieve this. My hope is that they'll announce a new licensing agreement with a data company during the coming quarter, as they promised would happen by year-end. I also hope that Spansion Inc. (Nasdaq: SPSN) will continue to expand its collaboration with it, and that Semiconductor Manufacturing International Corporation (SMIC) (HKSE: 0981) will reach the tape-out stage and make progress towards a product. Investors in Saifun know that 2007 will be critical for the company and that 2006 is a transition year.

What's critical? What does the company have to prove?

Spansion bought code licenses from Saifun, as did most other customers. Saifun has to prove that large companies are buying licenses from it in the data field too, otherwise its NROM technology will remain a niche technology. This will be proof that the technology Saifun is talking about works, because meanwhile, there's no large-scale proof. If data companies don't go in the direction Saifun expects, it will be in trouble. Meanwhile, it's very successful and innovative, and its model of selling intellectual property is very profitable and works for it.

PowerDsine should be a division of a large company. It will succeed better that way.

3. PowerDsine Ltd. (Nasdaq: PDSN)

Recommendation: Buy

Target Price - $8.50; premium - 7%

Line of business: PowerDsine designs, develops, and supplies integrated circuits, modules, and systems that enable the implementation of power-over-Ethernet (PoE) in local area networks (LANs).

In recent weeks, PowerDsine's share has skyrocketed on assessments that it is an acquisition target, or is at least in negotiations to be acquired, after it hired Citigroup (NYSE:C). Names mentioned as possible buyers include Freescale Semiconductor Inc. (NYSE:FSL), but Freescale was itself acquired by Blackstone Group LP and other private equity funds for $17.6 billion.

Amir says, I assume that Freescale is busy with internal matters, so it's no longer relevant, but I shouldn't be surprised if companies such as Broadcom Corp. (Nasdaq:BRCM) or Texas Instruments Inc. (NYSE:TXN) aren't interested in such a deal.

Why is an acquisition logical at all? Wouldn't it be better for PowerDsone to continue on its independent path?

With sales of $35-40 million a year, it's better for PowerDsine to be a division of a large company. It will succeed much better that way. This isn't a recommendation for every company; DSP Group or Saifun aren't right for sale, but it's true for PowerDsine. My target price of $8.50 is more or less where the share is now.

At what price could a deal be struck?

I assume that if an acquisition takes place, it will be at around $11.50 per share, not less than the IPO price. It should be borne in mind that General Electric Co.'s (NYSE:GE) investment in PowerDsine was made at $11.20 per share, and with a 23.7% stake in the company, I don't believe that it would sell for less.

In my opinion, investors making investments now are doing so because they think the company will be sold. However, if there is no deal, in my opinion PowerDsine is definitely worth its current share price, but not more. The rumors are strong, and after I saw the response by CEO Igal Rotem, I believe that a sale is only a matter of price, and not a question of whether or not they agree to be sold. Igal doesn't conceal the fact that he's prepared to sell if the right buyer comes along.

Published by Globes [online], Israel business news - www.globes.co.il - on September 28, 2006

Copyright of Globes Publisher Itonut (1983) Ltd. 2006

Copyright 2006 Globes. Source : Financial Times Information Limited.


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