Wednesday, March 07, 2007

Calls of Note Part 3

- Jefferies is positive on Energy Conv. Devices (NASDAQ:ENER) after Intel announced at an analyst's conference in California that it has sent samples of its 128MBit PCM to customers. This unit will be a drop-in replacement for NOR flash. While ENER has added several new licensees for Phase Change Memory (PCM) over the last year, the stock has trended downward as the market has discounted the licensees. Firm believes that, given Intel's announcement coupled with Samsung's announcement for commercial production, investors will likely react positively to the news. Importantly, ENER is not manufacturing PCM but only licensing the technology through its ownership in the Ovonyx JV. This should increase investors confidence as established players are validating the technology.

The firm notes tjeu have not included any revenues or licensing fees from PCM until they get better visibility, but they believe this segment could be worth $40/share. Firm derives this value by applying a 1% licensing fee to the Flash and DRAM market of $50B, which yields $500M in revenues to the Ovonyx JV. Since this is a licensing company, Ovonyx should generate north of 50% net margins, yielding over $250M in net income. ENER owns 40% of the JV, which would add over $100M in equity income or more than $2.50 upside to earnings.

Even if they assume that technology is only rolled out to its current licensees (~75% of the market), full roll-out does not occur until 2010, and discount this value back by 25%, it would imply a current value of $15.

ENER has pulled back 20%+ following the $0.01 miss in the quarter. The firm would look to aggressively add to positions. ENER is trading at a discount to the solar industry even though it has similar expected growth rates and the best balance sheet. They also believe that the company is likely to announce an additional two PCM licensees (possibly MU and Hitachi) over the coming months.

Reits Buy and $47 tgt.

Notablecalls: You better buy this one early on! Actionable call alert! See archives for additional color.


dcxavier said...

PCM is a big deal. In a nutshell, it is a memory that operates like flash, but at DRAM speeds. Eventually, it will be a eat into both, the same way flash substitutes for hard disks in many applications. There will be one or more big winners in PCM, like SNDK was in flash, problem is to figure out who.

notablecalls said...

nice comments, dcxavier!