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The Logitech F540 wireless headphones work with PS3 and Xbox 360. The mic mutes automatically when you swing it up to its closed position. (Lance Shows/Logitech)
The Logitech F540 wireless headphones work with PS3 and Xbox 360. The mic mutes automatically when you swing it up to its closed position. (Lance Shows/Logitech)

Stock to watch: DTS set to bring high-quality audio to smartphones Add to ...

DTS Inc.

Tuesday’s close: $16.34 (U.S.) a share, up 71 cents

52-week trading range: $13.90 to $31.99 a share

Annual dividend: none

Analysts’ ratings: There is one buy, six holds and two sells, according to Bloomberg data. Target prices ranged from $14 a share as estimated by Piper Jaffray analyst Michael Olson to $20 a share by analysts at Avondale Partners and JP Morgan.

Recent history: Shares of the U.S. developer of high-end audio technologies have taken a beating, tumbling 45 per cent over the past year. Its stock plunged to a 52-week low last November after DTS’s third-quarter earnings missed analysts’ expectations, and the company lowered revenue guidance amid sluggish demand for consumer electronics. Its technologies are in devices ranging from Blu-ray disc players to personal computers, car stereos and video game consoles. The Calabasas, Calif.-based company, formerly known as Digital Theater Systems, started in 1993 with some initial funding from film director Steven Spielberg. DTS debuted its sound system with the release of Jurassic Park, but divested its cinema division in 2009 to focus on consumer products. It bought SRS Labs Inc. last year for $148-million, a move that expanded its portfolio of audio processing patents and trademarks. Fourth-quarter results released in March were mixed, with the company trimming its revenue outlook to between $140-million to $146-million.

Manager insight: The battered stock of DTS is ripe for bargain hunters, given a looming catalyst from mobile devices like smartphones and tablets, says Larry Sarbit, chief investment officer and portflolio manager at Winnipeg-based Sarbit Advisory Services Inc.

The opportunity comes from the fact that sound from smartphones and tablets “is not great,” said Mr. Sarbit, who bought DTS shares over the past six months, and now owns a 10-per-cent stake in the firm in his I.A. Clarington Sarbit U.S. Equity Fund. “You will be able to use $50 headphones and get a surround-sound effect... By the end of this year, the mobile business will start to develop, and should start to really take off in 2014 and 2015.”

Qualcomm Inc. is expected to start making chips with a DTS code in the third-or-fourth quarter of this year, and that in turn will be sold to the makers of mobile devices, he said. “DTS is now busy building relationships with mobile phone manufacturers.”

The “exciting part” is the huge turnover in smartphones, as opposed to other gadgets or machines using their technology such as DVD players, personal computers or even cars, he noted. “The turnover is about 25 per cent a year in smartphones. That is a repeatable, predictable business going forward.”

DTS, which has no debt, is expected to generate at least $1.30 a share in free cash flow for 2013, he said. If you exclude $50-million in cash on the books, “it is trading at about 10 times free cash flow,” and that is without “the powerful wave of growth,” he noted. “Their costs are low because they don’t manufacture anything. Their costs are to develop the technology...It is a royalty business.”

Share of DTS will start to climb before the revenue starts to take off, he suggested. “If you see that they have signed a major mobile manufacturer as a client, then people are going to take notice of that before you actually see the revenue. You don’t want to wait for that. The market is very much looking beyond what is here today.”

It is not unreasonable to expect that rivals will come out with similar audio technology, Mr. Sarbit said. “But will it be at the same level? I think they [DTS] are pretty much alone in this area right now.”

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