DTS Premium Up Too High

Increasing demand for DTS, Inc’’s (DTSI) technologies in emerging applications such as cars and PCs augur well for the company’’s earnings growth. The company is also diversifying its business in the virtual audio technology and broadcast market, and is enhancing the use of DTS technology in standard definition applications, which we believe will drive revenue growth in 2009 and beyond.

Moreover, with the completion of the sale of its Digital Cinema business, DTS should be able to concentrate on the Consumer business and benefit from the anticipated acceleration of the high definition cycle. Nevertheless, we think valuation multiple expansion is unjustified, given the risks posed by a worse-than-expected consumer-led economic slowdown, and rate the stock a Sell.

The company’’s fortunes depend on the rate at which consumers adopt technologies, like DVDs and home theaters. Apart from the current economic slowdown, which we anticipate will continue to dampen earnings growth; we think the slowing demand for DVD players will moderate revenue growth for the company’s DVD components. DTS also faces stiff competition from Dolby Laboratories (DLB), a challenge in nearly all markets and product categories. Our six-month target price on DTSI is $32.

Sumit Singh contributed to the report.

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