We aren't taking any action in this alert, but want to offer some insight into what is driving the recent poor performance in shares of model portfolio name Microtune (TUNE) . The stock was recently trading at $5.73.
Over the past two weeks, LG Philips LCD and AU Optronics (AUO:NYSE ADR), both makers of flat-panel displays for high-end digital televisions, have announced weaker-than-forecast sales results in the second quarter, and production cuts as a result of building inventories. Most sell-side analysts believe this is just a near-term hiccup in the S-shaped growth curve of next-generation television volumes, but the shortfalls apparently are having an impact on Microtune's shares.
Microtune generates revenue through the sale of digital video tuners for cable modems and digital televisions. At the end of the first quarter, Microtune generated some 10% of its revenue from sales in the television market to customers such as ATI Technology ATYT and Samsung. ATI integrates Microtune's chips into its own graphic chipsets, which it then sells to television manufacturers such as Panasonic and Hitachi.
While a slowdown in television sales obviously would have a negative impact on Microtune's sales, it likely would be limited. And a slowdown would most likely be offset by growth in Microtune's nascent DVB-H standard mobile digital-video products, which are catching on with handset manufacturer LG Electronics in Europe.
We believe recent strong results from Arris (ARRS) , another model portfolio holding that sells cable modems that enable voice communications, are a good precursor for demand in Microtune's cable television business, which represents more than 50% of Microtune's total revenue. As such, the company should be able to top its own guidance for second-quarter revenue of $17.5 million to $18 million. More importantly, gross margins remain near 50%, and every dollar beat in revenue will flow meaningfully to the bottom line for Microtune.
We would recommend purchase of Microtune shares at the current quote.
William Gabrielski is a research analyst at TheStreet.com.
TheStreet.com is a publisher and a registered investment adviser. TheStreet.com Stocks Under $10 contains the author's own opinions, and none of the information contained therein constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. You further understand that Gabrielski will not advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the information contained in TheStreet.com Stocks Under $10 may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.
Past results are not necessarily indicative of futureperformance. Investing in the stocks chosen forTheStreet.com Stocks Under $10 model portfolio is riskyand speculative. The companies may have limited operatinghistories and little available public information, and thestocks they issue may be volatile and illiquid. Trading insuch securities can result in immediate and substantial losses of the capital invested. You should use only risk capital, and not capital required for other purposes, such as retirement savings, student loans, mortgages or education. As an editorial employee of TheStreet.com, Gabrielski is restricted from owning individual securities other than stock or options in TheStreet.com, Inc.
-----------------------------------------------------------Visit the TheStreet.com Stocks Under $10 site (available to subscribers ONLY) by clicking here: http://www.thestreet.com/k/su/index.html
To view TheStreet.com Stocks Under $10 portfolio on theWeb, click here:http://www.thestreet.com/k/su/portfolio.html
For customer service on your account please visit:https://secure2.thestreet.com/cap/selfserve/
-----------------------------------------------------------
(c) 2006 TheStreet.com, Inc., 14 Wall Street, 15th Floor,New York, NY 10005, Attention: Customer Service Department