Topic: Dividend Stocks

Gennum Corp. $12 – Toronto symbol GND

GENNUM CORP. $12 (Toronto symbol GND; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 35.8 million; Market cap: $429.6 million; SI Rating: Above average) makes chips and other equipment that let broadcasters store, manipulate and transport video signals without losing picture quality.

Video products supply about two-thirds of Gennum’s revenue. The company also makes audio products such as hearing aids and telephone headsets, as well as chips for high-speed computer networks.

In its first fiscal quarter ended February 28, 2007, Gennum’s profits rose 20%, to $0.12 a share (total $4.3 million) from $0.10 a share ($3.7 million) a year earlier. Most of the gain came from recent cost cuts, since revenue grew just 1.2%, to $34.9 million from $34.5 million.

Lower sales of older analog hearing aids, which Gennum is phasing out in favour of digital models, offset strong growth at the video and data communications divisions. If you disregard these older products, sales would have grown 11.6%.

Gennum sells most of its products to customers in the United States and Japan, so it’s vulnerable to currency rate movements.

In the latest quarter, changes in the value of the Japanese yen and the U.S. dollar offset each other, which minimized the impact on Gennum’s revenue. The company also uses hedging contracts to cut its currency risk.

The stock has struggled in the past few years, which led to a recent management shake-up. The new managers plan to aggressively drop underperforming products, and expand into new markets such as China, Korea and Taiwan.

The company spent $11.0 million (31.5% of revenue) on research in the most recent quarter, down slightly from $11.1 million (32.2% of revenue) a year earlier.

Gennum now plans to re-focus its research on specific products, and cut the time it takes to bring new products to market. That will probably cut its research costs to 20% of revenue. That’s still high, but should add millions to Gennum’s annual profits.

Gennum will probably earn $22 million or $0.61 a share in fiscal 2007, and the stock trades at 19.7 times that figure. But earnings could reach $0.82 a share in 2008, which implies a p/e of just 14.6. The company is still debt free, and has $44.7 million ($1.25 a share) in cash. That should help Gennum maintain its $0.14 dividend, which yields 1.2%.

Gennum is a buy.

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