Conductor company on the right frequency

By Graeme Dickson
Updated: 12:40 EDT, 25 August 2010

Keep an eye on semi-conductor wafer company IQE (IQE.) over the next few weeks.

IQE products are used in radio frequency devices, transistors and other advanced electronic components.

It has seen its shares slowly go from strength to strength over the last year, but it is still a fraction of what it was during the dotcom bubble, when its share price was hovering around 800p compared to yesterday's price of 24.25p.

I say keep an eye on the stock because the company is scheduled to release its interim results on 1 September. This will reflect on how well the company has performed in the six months leading to 30 June.

It will also update us on progress with existing collaborations, along with other new developments that could really help this company play catch-up with its larger, more highly-rated UK-listed peers, such CSR (CSR) Arm Holdings (ARM) and Imagination Technologies (IMG):

The company already stated in a trading statement back in mid-July that it expects its first-half results to be significantly ahead of market expectations. This is due to stronger than expected sales of wireless products and increasing demand for optoelectronic and silicon-based wafers.

IQE also said it is confident of strong demand for its products in the second half of 2010, particularly as a direct beneficiary of the growing appetite for smart phones and high-speed wireless technology.

IQE has net gearing of 50 per cent compared to net cash/negative gearing situations for the other three peers mentioned above, which might explain the valuation discount - however the net debt is slowly being reduced (£18.1 million in 2008 falling to £14.9 million in 2009) for the £108 million company.

Currently the stock trades on a price to earnings ratio of 47 times historical earnings, whereas Arm, CSR and Imagination Technologies trade between 60-87 times earnings. These all seem fruity, but given double digit growth forecast over the next two to three years, there is some logic to it all.

Even if IQE is to remain at 47 times earnings, if it can deliver 0.96p per share in earnings as forecast by a consensus of eight analysts, this equates to a share price of 45p.

This is a buy in its own right if all things go to plan, but after the recent half decent run, the stock could be vulnerable to slips along the way, especially in a precarious market. If the stock slips to 19-20p my inclination to buy would be even greater.

Update

Tissue Regenix – suggested as a buy last week 16p, the stock is unchanged. Nothing has changed with the idea so hang on for now.

Pursuit Dynamics – suggested as a buy last week at 223p: the stock closed yesterday at 244p and is going to plan. Look out for initial resistance at 275-280p. Through here expect more upside towards 320p.

United Utilities – suggested on 4 August at 593p, the stock closed yesterday at 564.5p. The company had a sharp spike yesterday to 620p before reverting back to the 560s, attributed to a 'fat-finger' trading error. JP Morgan downgraded the stock to neutral from overweight due to higher interest rates and property rates. However, the stock still looks right to own, so sit tight for now.

Bodycote – suggested on 28 July at 236.4p, the stock closed yesterday at 222.1p. This isn't going to plan and recently the industrial engineering sector, especially in the US received a bit of a pounding over the last week. However, the M&A activity surrounding the market and its industry and the financial strength Bodycote has managed to place itself in, still gives the idea a bit of credibility.

The material for this report comes from Alpha Terminal. The writer does not hold any shares or derivatives in the above mentioned companies.