UTStarcom Keeping Grounded

UTStarcom, Inc. (UTSI), a provider of IP-based telecom equipments, announced encouraging second quarter 2008 financial results, above our estimates.

This was primarily due to growing acceptance for the company’s IPTV solutions and personal communications devices (PCD). We believe market demand for the company’s IPTV and optical transport solutions remains firm as opportunities appear respectable at several carriers in Asia and Latin America. Recent divestiture of the PCD and mobile solutions businesses will foster adequate focus on the company’s core IP-based business, while simultaneously improving overall margins.

The company is in the midst of transitioning its focus on the Chinese PAS infrastructure and handset segments to an expansion of its equipment offerings for the global markets. However, we do not expect UTStarcom to achieve profitability any time soon. In addition, the market for IPTV solutions is highly competitive and this, together with global economic weakness, may hinder efforts to improve the company’s earnings power. We, therefore, maintain our Hold rating on the shares.

UTStarcom is difficult to value on the basis of P/E in view of negative earnings performance. On the basis of enterprise value (EV) to 2008 sales, UTStarcom is trading at 0.11x, which is significantly below the 1.1x peer group average. We set the same six-month target valuation of $5.50, based on an EV/Sales ratio of approximately 0.25x our fiscal 2008 sales estimates, as we believe valuation levels would improve with overall turnaround of general market conditions.

Nalak Das contributed to the report.

Read the full analyst report on UTSI

Read the full analyst report on UTSI