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Profit From The Most Common Problem With Mobile Devices

Marshall Hargrave

Cellphones are everywhere -- and everybody has the same problem... 

Getting the battery on their phones to last all day. 

Finding a charger that will give you a quick boost is an even bigger problem. And if you've ever needed to charge your phone while you're at an airport, good luck. Outlets at airports have become something of a grail. 

But it's not just about finding an outlet or a charger. It's often even more important to get your device charged quickly. 

One company that has developed a quick charger for the mobile market is little-known Power Integrations (Nasdaq: POWI)

While it might not be well known, the company has a market cap of just over $2 billion. Shares have also performed quite well over the past year and are up more than 50%.

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In that time, Power Integrations beat earnings estimates in three of the four quarters. For the full year 2014, earnings per share (EPS) are expected to come in at $2.72, which would be year-over-year growth of 10.5%. 

To capture the market opportunity in cellphone charging, Power Integrations is teaming up with Qualcomm (Nasdaq: QCOM) and its Quick Charge protocol. Production is set to start ramping up sometime around the middle of this year and should start contributing to sales and earnings in the second half of the year.

While the partnership with Qualcomm is exciting, the bigger opportunity lies in the fact that Power Integrations can support any other rapid-charging protocol that comes into the market. In fact, the company is working with several mobile-device manufacturers for battery charging.

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  Flickr/Kārlis Dambrāns  
  The HTC One (M8) is one of many upcoming devices to hit the market that will be able to take advantage of the new Quick Charge technology.  

Power Integrations is gaining market share in both the high-voltage power conversion and low-power markets. The company's main business is making low-power integrated circuits (IC) that convert alternating current to direct current, or vice versa. These integrated circuits can also regulate the voltage.

While the company has long dominated the low-power market, it has been making the transition and offering the same benefits in the high-power market. This transition will allow Power Integrations to capture market share in fast-growing markets such as LED lighting. 

The company estimates the total addressable market for LED at about $1 billion. Over the next two to three years, that number is expected to grow to about $3.5 billion. Capturing a mere 5% of that market could boost Power Integrations' revenue by 50%.

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One of the more impressive facts about Power Integrations is that the company generated nearly $100 million in cash flow from operations for the year. On a revenue base of $335 million, that cash flow margin is quite impressive.

The company's balance sheet grew by more than $100 million in 2013. The company now has $202 million in cash and has no debt. With the company generating cash at this rate, a dividend hike and more share repurchases are likely in the company's future. The current dividend yield of 0.5% is only a 17% payout of earnings.

In the fourth quarter alone, the company was awarded 23 U.S. patents and 18 foreign patents. At the end of 2013, the company had an intellectual property portfolio of more than 600 U.S. patents and nearly 500 foreign patents. This should help protect Power Integrations' technology going forward. 

Risks to Consider: Power Integrations is the leader in the IC-based power supply market, but it is facing competition from Fairchild Semiconductor (Nasdaq: FCS), STMicroelectronics (NYSE: STM), Infineon (IFNNY), ON Semiconductor (Nasdaq: ONNN) and Sanken Electric Co. (SANJF).

Action to Take --> Buy Power Integrations with a price target of $84, representing upside of 30%. That would put shares trading at the industry's average price-to-earnings (P/E) multiple of 27.5 based on next year's expected earnings.

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