Entropic Communications Inc. (symbol ENTR) is a semiconductor company with a difference. Entropic designs, developes and markets chips but it leaves the fabrication to others. The company's main products are used in the delivery of HD video and other products throughout a cononected home. For example, the DVR's that can record in one location and play on any TV in the house use the Entropic products to make that happen. These products are now used by Verizon FIOS, Time Warner and Comcast systems among others. It seems to me that it is only a matter of time before the other cable operators will have to adopt the technology to allow one DVR to play on a TV anywhere in the house. This means still more growth for ENTR.
The current estimate for earnings in 2010 is 53 cents and in 2011 is 75 cents per share. These estimates have been rising regularly for months. At the current price of $9.00 per share, ENTR is selling at 12 times next year's earnings with an earnings growth rate expected estimated to be over 40%.
The stock has gone up significantly over the last few months. It is about 10% higher than it was three months ago, and there has been some major moves up and down in that time. Clearly, it is a volatile stock.
Another plus for ENTR is that it has essentially no debt. It also appears to be fully funded for its operational needs for the foreseeable future.
Putting all this together, ENTR seems to have a bright future in an expanding field. Strictly on a valuation basis, the stock seems to have a major up side ahead of it.
In opening a position, however, I would recommend a more conservative approach. I like the purchase of the stoack coupled with writing the December 7.5 puts and the December 10 calls. As I write this, these two positions can be sold for a combined 65 cents. That makes the purchase price for the package $8.35. If the stock moves up above $10.00 by December expiration, you will sell at $10 for an annualized gain of over 120%. If the stock were to decline below $7.50, you will be obligated to purchase additional shares at a price which is only 10 times expected earnings. That would bring your average for the entire position to a cost of $8.02. The most likely result, however, is that the stock will be between $7.50 and $10.00 at December expiration an you will have purchased the shares for $8.35. In my opinion, this is a very good entry point for this company.
Obviously, for those of you who are not familiar with writing puts, you need to investigate the risks of such a strategy before investing.
Disclosure: I am long ENTR and have written both puts and calls on the stock.
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