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OTCJournal December Profile: Irvine Sensors (NASDAQ NM: IRSN)


Stock Listing: NASDAQ NM: IRSN
Estimated Shares Issued and Outstanding: 7.03 Million
Estimated Public Float: 5 million
Today's Closing Price: $1.72
Market Capitalization: $12.1 Million
52 High and Low: $3.41 x $.75
Corporate Web Site: http://www.irvine-sensors.com/
In our weekend edition we alluded to a profile on a stock which had the potential to be a Peter Lynch like "10 bagger" for investors with a two to five year time horizon.


Irvine Sensors is that company. Based on today's closing price of $1.72, investors would have to see the stock appreciate to $17 over the next two to five years in order to achieve these results.

The market would have to place a value of $120 million on this company during that time frame with the current number of issued and outstanding shares.

As you can see from the chart, the market has been willing to place on considerably higher valuation on this company in the past. In fact, the stock has dropped from a 2000 split adjusted high of $366 to its current anemic $1.72 level, suggesting there is substantial upside potential for investors.

In fact, at today's level, the market is only valuing the entire company at $12 million, despite the company holding 56 technology patents, numerous patents pending, and over $200 million invested in the development of their technology.

This stock is like an airplane in a turbulent thunderstorm. Having lost altitude in a violent down draft, the pilot has regained control, and is now returning to a higher altitude and calmer air.

If current key projects yield big defense related contracts, the $17 level over two to five years is a realistic target. In the short term, possibly over the next 30 to 60 days, we believe Irvine Sensors could easily rebound to the $3 level as year end tax selling abates, buyers come back, and corporate developments are reflected in the stock price.
Pioneering Technology- Chip Stacking Provides Massive Processing Power in a Small Space




The fiscal 2003 Defense budget earmarks $9.9 billion for investment in Science and Technology. Those funds will be used to develop the military and homeland security technologies of the future.

This next generation technologies have several common key components: They all require massive computing power, contained in small, lightweight, and mobile formats, requiring as little power possible.

Irvine Sensors has been in business since 1980 and is the pioneer in developing "Chip Stacking" technology. The company developed the process by which multiple computer chips are bonded together in a sequence to provide massive processing power in a very small space.

Irvine Sensors has developed many applications for this technology. We have decided to feature the three. The last two represent immediate upside potential for shareholders and are strong growth arenas for the company.
Infrared and Wireless Applications




If you own a PDA which integrates with your cell phone or any other device, chances are 50% that the infrared technology in your PDA was supplied by the Novalog division of Irvine Sensors. They are the dominant supplier to Palm.

Pictured here is a transceiver module for a PDA, cell phone, or pager, which allows the device to exchange information through infrared light with other devices. This infrared technology serves as the platform from which the company has expanded into various miniaturized, portable infrared detection devices which can be used in military and homeland security applications.
Miniaturized Thermal Video Cameras




Pictured here is a tiny miniaturized video camera that takes pictures by detecting heat emission. The camera operates in a broad range of temperatures and requires a power source equivalent to a couple of AA batteries. It lies dormant until detecting motion in its vicinity, then can transmit the images back to a central location.

Consider the military and homeland security implications of this technology. Vast areas can be virtually patrolled by the placement of these miniaturized cameras in sensitive areas both in the field and on US soil. This technology is also being implemented in night vision weapons sights, and sensors for small, drone aircraft.

Prototypes of these cameras are being delivered under a development contract with the US Army.
Video "Jigsaw" Technology


This technology requires massive computing power, and has the potential to be the short term "Holy Grail" for Irvine Sensors. This amazing imaging technology allows the military to virtually "see through" a multitude of spaces to learn what is hidden behind cover.

Originally announced in May of 2002, it was revealed Irvine Sensors was named "prime contractor" by the Defense Advanced Research Projects Agency (DARPA). Northrup Gurmman, Sarnoff Corp, and Arete Associates are sub contractors.

In a press release at the end of September, Irvine Sensors disclosed the development contract would eventually equate to $9.6 million in revenues, and field testing was scheduled to be completed by May of 2003. Irvine Sensors expects to begin discussions with DARPA for long range military plans for this technology in February or March. We are planning on providing an online demonstration in a future edition.

The "Jigsaw" technology is used to enhance combat target detection and identification by use of laser imaging. The technology takes density images from aloft, and through complex computations can actually reproduce images below less dense layers. From this, the images are reassembled in pieces like a virtual puzzle. A practical example is the technology's ability to uncover military hardware (tanks, planes, guns, etc.) beneath any sort of camouflage or cover, such as trees or deeply dug trenches with ground cover.
Conclusion- Financial Performance and Current Valuation




June quarterly results came in at $3.94 million in revenues, up from $2.3 million the prior quarter, an increase of 71%. Irvine Sensors reported losses for the June quarter of $1.72 million, but after subtracting non cash and one time expenses from that number, actual cash losses from operations were only $536,500.

Their September quarter and fiscal year end numbers are due out any day as their fiscal year ends in September. When they are available, we will report them in a special edition.

Based on the June quarterly results, Irvine Sensors is annualizing at $12 million in sales. Revenues grew 71% from March to June. If the trend continues, investors could assume they will see growth again in the September quarter and hopefully diminishing losses.

Fundamentally the company is probably absurdly undervalued. Like many of its technology brethren, the market has priced the company for insolvency . The stock is trading at less than one times annual sales. The market cap is a mere $12 million. With $200 million invested in their technology over the past twenty years, their enterprise value should be considerably higher. Hence our belief the stock could appreciate substantially.

On a technical basis the chart we have provided, drawn from the highs made last May when the company announced the DARPA contract, suggests the stock is entitled to bounce back into the $2 range if the current trend continues. A move above $2.40 would be extremely bullish, and could signal a major trend reversal.

The stock has risen recently off a long term base of $1 to $1.72 on extremely light volume. Tax selling pressure on this stock has abated, so it has been able to rise unchallenged. Therefore, a pull back into the $1.30 to $1.40 range would represent the ideal entry level. However, if the right kind of news comes along the stock may never see these levels again.

This stock has an average daily trading volume of 32,000 shares, so it could be subject to violent price swings in either direction when volume materializes. Common sense should be used when accumulating a position. Use a limit order and have a little patience. If history repeats itself, the high for the day will be made about an hour after the market opens.

As with any microcap you must assume you could lose all your money if the company falls on hard times. On the flip side- the unfortunate cost of the international war on terrorism could make Irvine Sensors a company who's time has finally come.

Disclaimer
The OTCjournal.com Newsletter is an independent electronic publication committed to providing our readers with factual information on selected publicly traded companies. All companies are chosen on the basis of certain financial analysis and other pertinent criteria with a view toward maximizing the upside potential for investors while minimizing the downside risk, whenever possible. Moreover, as detailed below, this publication accepts compensation from certain of the companies which it features. Likewise, this newsletter is owned by MarketByte, LLC. To the degrees enumerated herein, this newsletter should not be regarded as an independent publication.
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MarketByte LLC has been pledged a fee of $25,000 by Irvine Sensors for coverage through December 31, 2003. As part of the agreement, one of the prinicipals of MarketByte LLC has been pledged 75,000 options, with an exercise price equal to the closing price of Irvine Sensor's stock on March 4, 2003, contingent upon stockholder approval of the option plan to be voted on at the annual meeting of March 4, 2003.

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