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Integrated Device Technology Appears to Be on Solid Footing

With lower multiples than its communications-chipmaking rivals and new products, the company could be poised for an ascent.
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Quick & Dirty

SAN FRANCISCO -- Please excuse last night's absence, I was tied up yesterday by both a

chat with

Chris Edmonds

(who's really a good guy, no matter what the tabloids say) and with an appearance on

, which I'll get back to in a minute.

In both the chat and

Columnist Conversation

yesterday, I said -- in so many words -- the market remained risky. Not that it couldn't/can't rally, or that it was/is going to zero, just that I was/am skeptical of the newfound (

rediscovered? recalibrated?

) bullishness of the

gurus, among others. I will remain so until the major averages break out of their respective trading ranges. To the upside, that is.

Today, the

Dow Jones Industrial Average

fell 0.5%, the

S&P 500

TheStreet Recommends

shed 1.3% and the

Nasdaq Composite

lost 4.2%.

Wall Street's Forgotten Man

So the

appearance was for an interview of Alan Krock, CFO of

Integrated Device Technology

(IDTI) - Get Integrated Device Technology, Inc. Report


Shares of the semiconductor maker leapt 13.3% yesterday, joining a host of chip stocks on the upside; the

Philadelphia Stock Exchange Semiconductor Index

rose 3.9%. In addition to the general desire to own chip and related stocks, IDT also got a boost from an upgrade to strong buy from buy at

Banc of America Securities


Today, IDT fell 2.4% as the entire chip sector shuddered in the wake of

Merrill Lynch's

downgrade of the communication chip makers (more on that in a minute); the SOX shed 5.6%.

Ironically, it was just on Oct. 27 that that same Banc of America analyst, Richard Whittington


IDT, responding to the slowdown signals coming from






most prominently.

Reflecting broader fears of a slowdown in the chip space, IDT shares had already fallen from an intraday high of $104 on Sept. 20. After Whittington's downgrade, the stock traded as low as $54.0625 on Oct. 27.

Cisco Systems

(CSCO) - Get Cisco Systems, Inc. Report

confirmed the slowdown concerns last week, when it talked about inventory building. Cisco accounts for about 15% of IDT's revenue, a large reason (along with the market's general malaise) IDT's shares continued to decline, trading as low as $32.125 last Friday.

So what changed Whittington's mind (besides the price, and maybe that was enough)? Whittington was unavailable to explain his turnabout. But in his piece yesterday, the analyst cited "improving visibility in

communication-specific semiconductors," which "raised confidence" the company would be able to meet his earning estimates of 88 cents per share for the current quarter, which is the third quarter of the company's fiscal year.

Whittington also waxed effusive about the pending rollout of IDT's new Internet protocol (IP) co-processors, which are based on CAM (content addressable memory) technology and developed in conjunction with Cisco for the networking giant's 6000 series IP routers. Whittington predicted the new products will have a "significant impact" on IDT's results beginning in the company's fiscal fourth quarter. He also forecast the new processors could approach 10% of IDT's overall revenue by midyear 2001 and sport gross margins of "80% or better."

In our interview, Krock confirmed the new processors "could be 10% of sales in the near term," but conceded Whittington's "margin estimates are probably a little bit on the high side." Krock said 50% gross margin is more likely for new technology in the space but expressed hope the new processors eventually could achieve margins close to the company's average, which is north of 60%.

The discrepancy stems from the fact that Whittington generated his estimates after speaking with IDT's customer -- Cisco in this case, which has said the 6000 series could be a $5 billion annual business (for Cisco), according to Dave Cote, vice president at IDT. This is the latest example of how the

Securities and Exchange Commission's

new Fair Disclosure rule has made life more difficult for sell-side analysts, and the investors who follow their work.

He Likes It, Hey Mikey

But the bigger issue here is about IDT itself. In the interview and again in the company's midquarter conference call Wednesday, Krock and other company officials declared that IDT remains on track to generate earnings and revenue as expected for the current quarter. The consensus estimate is for earnings of 86 cents and revenue of $288 million (which would be a record for the company), according to

First Call/Thomson Financial


IDT officials further maintained they have yet to see any evidence of slowing, either in end markets or in demand from their big customers. Nor have they seen any unusual inventory situations.

In addition, IDT said in its conference call that the board recently authorized a 5 million-share, stock-buyback program, although it has not yet been tapped.

IDT earned 97 cents in fiscal 2000 and is expected to earn $3.13 a share for the current fiscal year, with gross margins surpassing 60% and operating margins approaching 40%. Revenue is expected to top $1 billion for the current fiscal year and grow 23% in fiscal 2001.

Still, Wall Street's collective eyes generally glaze over when IDT is mentioned. Only six analysts cover the stock, and most market participants say they're simply "not up to speed" on the story.

Maybe investors have turned a blind eye because the company lost 50 cents a share in its fiscal 1999. Or because IDT is still changing from being predominantly focused on the commodity memory-chip business -- SRAMs account for about 30% of its revenue, although officials expect that to be halved by fiscal year 2002 -- to one focused on communication chips, which account for 70% of revenue.

Still, IDT trades at just below 12 times expected earnings of $3.71 for fiscal 2001. Even after today's big Merrill-inspired losses of at least 13%, other communication/specialty chipmakers such as

PMC Sierra



Applied Micro Circuits





sport much higher multiples.

Those companies may have faster growth and higher-end products (in some cases), but I have to wonder if the value discrepancy isn't a little overzealous. The fair value for communication chipmakers probably lies somewhere between IDT's price-to-earnings ratio of 12 and Broadcom's P/E of 100.

If the goal these days is to find companies with solid, sustainable growth in expanding markets that have been overlooked or undervalued by investors, I contend IDT fits the bill.

The IDT story got me thinking about recent a conversation regarding

bounce candidates I had with John Bollinger, president of


Bollinger agreed IDT is a candidate for inclusion on that list. He predicted the stock's nascent rally would soon run out of steam -- which it did around 2:30 p.m. EST time Thursday after trading as high as $46.375 -- and will likely retest its recent lows of around $32 and perhaps break marginally through soon thereafter.

Once that occurs, "buy on the first big day on the upside where volume expands above the 50-day moving average," Bollinger recommended, suggesting the IDT's risk-reward at that juncture would be compelling.

Assuming IDT is everything it appears to be, I agree.

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.