GENNUM CORP. $9.05 (Toronto symbol GND; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 35.6 million; Market cap: $322.2 million; SI Rating: Above average) makes equipment that lets broadcasters store, manipulate and transport video signals without losing picture quality. This business accounts for 75% of Gennum’s total revenue. The company also makes chips for computer networks.

Gennum recently completed a major realignment of its operations. It sold its slow-growing hearing aid and headset businesses, as well as part of its video chip operations.

The company used the proceeds of around $25 million U.S. to finance its $25.3 million U.S. purchase of privately held Snowbush Microelectronics, a Toronto-based developer of technologies that help chip-makers improve the speed and reliability of data transmissions inside computers and other electronic devices. Snowbush’s expertise will help Gennum design better high-speed data and video chips.

In its first fiscal quarter ended February 29, 2008, Gennum’s revenue grew 32.0%, to $30.1 million from $22.8 million a year earlier (all amounts in U.S. dollars except share price and market cap). Snowbush contributed $2.1 million to the most recent quarter. However, earnings fell 23.5%, to $0.13 a share (total $4.6 million) from $0.17 a share ($6.2 million), due to higher marketing costs and income taxes.

Gennum continues to spend heavily on research. In the latest quarter, research costs rose 98%, to $9.9 million (32.8% of revenue) from $5.0 million (22.1% of revenue) a year earlier. Snowbush accounted for $2.0 million of that increase.

This spending has let Gennum launch several successful new products in the past few months, particularly video equipment that handles high-definition (HD) TV signals. Sales of HD equipment grew 14% in the most recent quarter, as broadcasters in the United States prepare to switch from analog to digital transmissions in February 2009. New computer network equipment also helped fuel sales.
Gennum’s long-term debt of $2.6 million U.S. is less than 10% of its annual cash flow. It also has $47 million U.S. or $1.32 U.S. a share in cash. That gives it plenty of room to make acquisitions or expand research.

The company will likely earn $0.71 U.S. a share in fiscal 2008, and the stock trades at 12.5 times that estimate. It’s also attractive at 2.2 times its revenue of about $4.00 U.S. a share. The $0.14 (Canadian) dividend yields 1.5%.

Gennum is a buy.