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General Body Meeting 04.14.11
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Agenda
Announcements News Updates Tech Sector Pitch
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Announcements
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Senior Analyst Applications
Senior Analyst Application for Fall Take Charge of a Sector
Deadline: Saturday, 4/16
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News Updates
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ECB Rate Hike
+ 25 bps to 1.25% starting 4/13 Rate 1% from June 2009 - Mar 2011 Target rate “below but close to” 2%
medium term Euro area CPI 2.4%, February
projected 2.8%, March PIIGS lag the rest of Europe
Bailed out: Portugal, Ireland, Greece Fed unimpressed
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Portugal
Political crisis since Socrates' resignation
Mid May deadline to agree to austerity program
Looking to receive aid before June Cross-party talks are crucial No new proposal to bailout plan in
Wednesday’s meeting with opposition
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Safe Bulkers
Secondary offering of 5mm shares at $8.40
8% dilution Stock dropped from $9.26 to $8.30 Citi lowers price target from $10 to $9 Proceeds will fund ship building costs
and general operations Book Runners: MS & BAML Co-Manager: Evercore
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Media Sector:The Walt Disney Update
On April 8th, Disney broke ground on Shanghai Disneyland Theme Park Expected to take 5 years
The theme park is part of a bigger $4.4 billion Disney resort (hotels, restaurants, retail shops, etc)
Ownership 43% to Disney 57% to a state-owned businesses (Shanghai
Shendi Group Co. Ltd) Costs and Profits divided accordingly
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Media Sector:The Walt Disney Update
Event Attended by Chinese officials and Disney
managers Attracted local media’s attention
Disney’s CEO (Robert Iger)"We'd love to develop multiple other businesses in China, certainly in television. We're growing our games presence. We're growing our retail presence. We're growing our English-language learning presence. None of it is directly connected to this development, other than we view China overall as a great market."
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Cisco
April 12: Cisco kills the Flip line of portable video recorders Cutting 550 jobs (<1% of total) Refocusing on switching business Flip previously posted <1% of total sales Originally purchased for $590M in 2009
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Cisco
Key Goal: shore up main business operations (routers and switches) “Cisco needs to choose between
protecting share or preserving margins” Typically took 70 to 80% margins,
compared to competitors (IBM, ORCL, HPQ) which take 40% margins
Beginning to lose market share to smaller competitors, margin has decreased to 64% in FY 2010
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Cisco
Consensus: Refocusing on core business is a positive Company can leverage its dominance to
counteract decreasing trend in market share
Axing the Flip business is a “drop in the bucket”
More changes are required, but more changes are expected
Uptick in IT spending in 2011 will still represent a positive factor despite losses in market share
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Industrials Sector Update:Silver and Gold Prices
Nick Hosseini
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Silver
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Gold
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Causes
Industrial growth Silver essential in many industries Growth in Asian markets
Increased investment Worry over events overseas, increased energy
prices Silver in more abundance than gold
Increased demand for silver coins
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Entropic Communications, (ENTR)
Joshua Lyons, Howard Yu,
Ryan Haid, Hyungjoo Kim
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Industry Overview
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General Industry Overview
Semiconductor – Broad Line Heavy Hitters:
Intel Texas Instruments International Business Machines
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Industry at a Glance
Market ShareIntel (32%)Texas Instruments (13%)International Business Machines (4.5%)
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Summary within US
Innovation for PCs, TVs, broadcasting/telecommunication services
Expected revenue for 2011: $59.3B Big players reliant on services that
heavily use semiconductors are expected to increasingly outsource within next 5 years
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Key External Drivers
Private investment in computers and software
Demand from electrical equipment, appliance and component manufacturing
Price of semiconductor and electric components
Research and development expenditure Trade-weighted index
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Products and Services
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Industry Costs
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Company Overview
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Company Overview
Leading fabless semiconductor company designing, developing and marketing system solutions to enable connected home entertainment
Provides next-generation silicon and software technologies to the world’s leading cable, telco and satellite service providers, OEMs and consumer electronics manufacturers
Market Cap: 685.4M Ranked 28/49 among competitors (Yahoo! Fi-
nance)
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Company Overview
Location Headquarter in San Diego, USA Worldwide Sales Locations
San Jose, USA Berkshire, UK Hong Kong Shenzhen, China Taiwan Yokohama, Japan Korea
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Company Overview
Location Headquarter in San Diego, USA Worldwide Sales Locations
San Jose, USA Berkshire, UK Hong Kong Shenzhen, China Taiwan Yokohama, Japan Korea
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MoCA
Multimedia over Coax Alliance: a global home networking consortium that sets standards for the distribution of video and other multimedia entertainment over coaxial cable
Founding member Entropic’s MoCA home networking
solutions clients: DIRECTV, Verizon FiOS, Time Warner Cable, Comcast, Cox etc.
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MoCA
Turns the coaxial cable already installed in your house into a robust, high speed whole home entertainment network
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Product Offerings
Focused on bringing connected home entertainment into and throughout the home
Product families Home Networking Digital Broadcast Satellite Solutions Broadband Access Silicon TV Tuners
Opportunity for expansion to home stereos, game consoles, Blu-ray players etc.
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Product Offerings
Home networking chipsets Chipsets based on the Multimedia over
Coax Alliance (MoCA) standard 85% of MoCA market control, and the
market is expected to grow at 35%-40% per annum
Direct broadcast satellite (DBS) services Significantly reduce the deployment costs
for DBS providers by allowing them to send multiple video streams from individual or multiple satellites into the home over a single cable
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Product Offerings
Broadband access chipsets Use the coax infrastructure to deliver “last
kilometer” connectivity for high-speed access to single-family homes and multi-dwelling units
Ethernet-over-Coax (EoC): for multiple dwelling units
Silicon TV tuners Designed for numerous digital television
applications and offer OEMs cost effective, higher performing and integrated components
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Past Acquisitions
Vativ Technologies for $43.8M (4/4/08) A provider of high-bandwidth, advanced
digital processing solutions for digital television and 10 gigabit Ethernet markets
RF Magic (7/2/ 2007) A provider of digital broadcast satellite
outdoor unit and silicon tuner solutions Arabella Software Ltd (5/1/2007)
A developer of embedded software
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Financials
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Overview
Share price: 7.45 (4/13/2011) 52wk range: 4.31-13.96 Market cap: $685.4 mil YTD: -62.15%
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Industry Comparison
Ratios ENTR Industry
P/E TTM 9.1 18.3
P/B 2.6 1.3
P/S TTM 2.8 2.9
ROE TTM 40.8 1.1
Operating Margin
15.8% 20.8%
Net Margin 30.8% 1.8%
Debt/Equity 0 1.3
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Income Statement
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Net Income Bar Chart (Annual)
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Net Income Bar Chart (Quarterly)
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Revenue Drivers
Much of ENTR’s revenue comes from thriving DirectTV business, supporting Entropic’s MoCA business
DVR subscriber growth at 6% Q-Q & MRV (multi-room viewing)
33% of new subscribers took the MoCA-powered MRV capability => increasing popularity of MoCA devices
New “DirectTV Cinema” services = incremental revenue opportunity
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Balance Sheet
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Balance Sheet Bar Chart (Qrtly)
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Cash Flow Statement
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Earnings Forecast (Bloomberg)
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Risks
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Fundamental Risks
Delay in launches of multi-room DVR (Digital Video Recorder) services by satellite providers could negatively impact ENTR’s results
Rapidly growing market will attract more competitors: Broadcom is also offering MOCA (home
entertainment networking system) solutions, going head to head with Entropic
Could cause revenue erosion, a cause of investor worries
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Fundamental Risks
However, ENTR remains the product leader
ENTR is the patent holder of technology related to MOCA, entitling ENTR to royalties from Broadcom (offsets revenue loss)
Growing market size of MOCA, currently on 10% of households in market penetrated in March 2011
Size of MOCA market enough to support 2 major chip makers
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Technical Risks
Since January, ENTR’s stock price has experienced negative momentum due to CEO rejecting acquisition possibilities and perceived threat of new competition
As a result, price of ENTR highly undervalued However, fundamentals of ENTR remain sound When ENTR demonstrates further revenue and
NI growth in Q2 results, translates into trend reversal
Short squeeze effect may push price of ENTR further upwards (Short Ratio = 34.8%)
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Catalysts
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Catalyst 1/4
Semiconductor sector strength TI’s 6.5B acquisition of National
Semiconductor (April 5) may be the start of a rally
Increased demand in the tech sector Strong demand for semiconductors from
new markets Indication of improving performance for
the semiconductor ETF, increased tech investments
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Catalyst 2/4
Earnings Report (April 26) Likely to see dramatic growth in EPS and
sales Historically Entropic has beat expected
earnings and EPS in the last 6 quarters If reported numbers match expectations,
the P/E would drop as low as 8 assuming no price change
Some have forecasted 200%+ growth in EPS, 40% increase in sales
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Catalyst 3/4
Major Expansion in China Tianjin Broadcast network, and Guangzhou Digital Media,
chose Entropic technology to offer IPTV services Indicates company has a positive working relationship with
Chinese government China has exceptional potential for future consumption of
Entropic’s technology Currently under 30% internet penetration (Entropic provides
internet connectivity hardware) Currently Negligible IPTV penetration (Entropic is dominant in this
sector) China macro trend: increased imports, trade deficit 2011-2015 Five Year Plan: specific mention of plan to
increase electronic and high-tech imports to ease trade tensions with developed markets
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Catalyst 4/4
Acquisition Entropic’s rapidly growing business and international
expansion makes it a credible threat to the challenge of new entrants, such as Broadcom and Qualcomm
Potential value of the MoCA market which Entropic could take greatly exceeds its market cap
Entropic is way ahead of competitors in making huge investments to develop superior MoCA products
In January, Entropic CEO stated they prefer to be a “standalone company” Speculation that this posture has served to increase the perceived
competitive threat of Entropic Increased competitor interest in a buyout
There are two major competitors (Broadcom and Qualcomm): a bidding war? Purchase price at 15+ per share?
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Thesis
Unfairly Underpriced Low P/E (~10) Previous close at 7.45, 12-month consensus TP at 15.5
Volatility will Stabilize Relatively new company so there is investor uncertainty Entropic has consolidated and continued to build on its gains Well poised to undergo dramatic further development as an
independent company
Strong Catalysts for Price Performance Sector growth Earnings report China expansion Buyout possibility
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Proposal
Buy Stop: 230 shares @ 8.50 price level
Total value: $1955
QUESTIONS?
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Thanks for coming by!
You are given a coin that comes up heads with some probability greater than ½ and less than 1.
Can we use it to simulate an unbiased coin toss?