Friday, December 17, 2010

Data I/O ( Nasdaq - DAIO )

Data I/O (DAIO $5.75) is the leading provider of programming systems used to load data onto semiconductor chips.  The company's automated machines convert blank semiconductors into intelligent devices.  Demand is rising due to the expanding complexity of electronic products, and the proliferation of computer chips into an ever widening array of applications.  Data I/O's systems are employed in a broad spectrum of devices, but are particularly relied upon in high end chips containing large data files and programs.  Demand is fueled by the volume of data that has to go in, along with other factors such as physical chip size, production line rates, and geographical proximity to final assembly plants.  A mitigating factor is Data I/O's own ability to speed up its machines' performance, enabling customers to process more chips per minute.  Competition exists, but much of that resides at the low end of the market.  Several prospective customers rely on in-house solutions, which also limits the company's potential somewhat.  Economic factors play a significant role, although those cyclical ups and downs tend to balance out over the long haul.  Right now Data I/O appears to be in the early stages of a major upturn that could last well into the coming decade.

Financial results experienced a nosedive in 2009 due to the recession.  Performance has rebounded in 2010 to prior levels, and momentum is continuing to build.  For the entire year we estimate sales will finish at $27 million, consistent with the 2008 level, and up 46% from the year before.  Non-GAAP earnings (see "Accounting Notes") could reach $.28-$.30 a share.  Data I/O ended the September quarter with $17.5 million in cash, moreover, representing 60% of total assets.  That figure might expand further in the seasonally strong December period.

Next year sales of $32 million (+18%) appear to be a realistic target.  Margins promise to widen on the higher volume to provide a 25% gain in earnings to $.35 a share.  Booming smartphone growth combined with solid gains in other electronics intensive industries could support a stronger showing.  Data I/O also could put its cash reserves to work via acquisitions or joint ventures, creating the potential for further leverage.  The company has increased its diversification efforts of late, so a material transaction is a realistic possibility.  A variety of targets have been identified, both in Data I/O's core market and in related areas. 

In 2-3 years sales could attain $40-$45 million, exclusive of acquisitions.  Margins may continue to widen, propelling earnings into the $.50-$.60 a share vicinity.  Acquisitions could provide an additional $.10-$.15 a share in earnings (assuming $10 million invested at a 10%-15% rate of return).  Applying a P/E multiple of 18x to the midpoint of the range suggests a target price of $10 a share, potential appreciation of 75% from the current quote.  A higher valuation is possible if Data I/O succeeds on the acquisition front.  The company's industry leading position could make it an attractive takeover target itself. 

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