I’ve been following UTSI for some time and given today’s dip in the stock price, I think it’s a good time to pick up some shares (current price about $3.25).

Even though the company is still losing money, the stock price appears to assign absolutely no value to the company’s current remaining business, which throws off over $700 million in annual sales. Therefore, improvements in operating results over the next year could lead to a double in the stock price. At the same time, given the fact the company’s enterprise value is already negative, I don’t see much downside risk if results continue to disappoint. The probability of improving results over the next year has increased following recent management changes and the divestiture of the company’s largest business.

Business: UTSI is involved in IPTV with a strong presence in emerging markets. IPTV is a hot area of technology.

What Changed Here: Significant management changes and the divestiture of the company’s largest business.

The numbers: 123 million shares outstanding for a market cap of about $410 million. Following the company’s recent divestiture, UTSI will have about $470 million in cash and only about $30 million in debt. So the enterprise value here is actually negative. At the same time, the company’s remaining business throws off about $700 million in sales. Even though it loses money, I find it hard to believe that $700 million in sales is worthless.

Upside/Downside: If the company can show any indication of reaching breakeven, it’s not unreasonable to see a $7 price target, which would value the company at 0.5X EV/Sales. On the downside, as mentioned above, it’s hard to see how much lower the company’s stock can go, since the business already is assigned a negative value. Obviously, if UTSI continues to burn cash the stock will at some point be worthless, but still $700 million in sales needs to be worth something to someone and it will be many years before the company burns thru $470 million in cash. As such, I’d use $3 as the maximum downside over the next year. This implies a $5 to $6 fair value for the shares.

It is interesting to note that UTSI was a $30 stock back in 2004 and the stock is off around 40% from a July 2008 high of $5.50.

A good blog which discusses UTSI on a weekly basis can be found at:

http://utstarcom-stocknews.blogspot.com/