At first glance, it’s puzzling why Mindspeed Technologies (NASDAQ: MSPD) didn’t see its share price take off in 2010. Technology stocks saw a recovery and the “tech buzz” gained momentum during the year. But when you consider that it operates in a very volatile industry—semiconductors—it makes sense.
Mindspeed Technologies is in the communications business, designing semiconductor solutions for applications in both the wireline and wireless network infrastructure. Its tentacles are everywhere, including separate (but interrelated and converging) enterprise, broadband access, metropolitan and wide area networks. MSPD sells its products to the likes of Alcatel-Lucent (NYSE: ALU), Cisco Systems (NASDAQ: CSCO), China Telecom (NYSE: CHA), China Unicom (NYSE: CHU), Nortel Networks (PINK: NRTLQ) and a host of other household names. The company’s three broad product lines include multiservice access, high-performance analog and wide area networking, with MSPD’s sales evenly split between the three.
Since it is a fabless semiconductor company, Mindspeed doesn’t manufacture the chips itself. That means MSPD doesn’t have to worry about all the inherent risks that come with manufacturing (like materials, assembly lines, employment, etc.). Instead, it uses third parties, including Taiwan Semiconductor Manufacturing Co. (NYSE: TSM), Amkor Technology (NASDAQ: AMKR) and Advanced Semiconductor Engineering (NYSE: ASX) for wafer fabrication and assembly and test services.
And while the company beat analysts’ estimates for four quarters in a row, the fact remains that its industry lives and dies by its book-to-bill ratios, which was .98 in October. That simply means that $98 worth of orders were received for every $100 of products billed for the month, signifying that orders are not yet overtaking sales.
But the good news is this: Sales have been growing substantially in the industry, as evidenced by North American semiconductor sales increasing148% year-over-year in the third quarter of 2010, and up 22% from this year’s second quarter. That sets the stage for a great 2011!
As corporations become more secure in their earnings projections for 2011, they are going to begin opening their pocketbooks for some serious technology spending — and faster, more efficient chips will be on the top of their New Year’s list. I also won’t rule out the possibilities of higher share prices as I believe there will be substantial merger and acquisition activity in this sector as companies begin looking to buy—not build—certain technologies.
MSPD is certainly doing its part in capturing new contracts and agreements, which bodes very well for the company’s 2011 financials. And with Mindspeed marching quickly forward into 4G, I think the potential is dynamite.
Why I Like Mindspeed:
- The communications sector is transitioning to the next generation of mobile networks, creating tremendous opportunities for growth.
- Emerging and developing countries will be ramping up rapidly their telecom deployment.
- Broadcast video is going to see significant growth in high-definition TV.
- Institutional growth is increasing, and institutions currently own only 44% of MSPD’s shares, leaving lots of room for them to come into the stock and help our shares appreciate.
- The company’s stock is undervalued, and is easily a double.
Buy MSPD under $7. My first target is $12.50, where I will sell half of our shares. I will then hold the rest for a final target of $16.
Check out the other FREE stock picks that make up InvestorPlace.com’s Top 10 Stocks for 2011.
Nancy Zambell is the editor of Buried Treasures Under $10. As of this writing, she was recommending Mindspeed to her paid newsletter subscribers.