Ditech Networks cleans up your telephone calls

As telephone users, most of us have come to take clear connections pretty much for granted. Our service providers can't do that. One of the outfits that helps them clean up the quality of our calls is headquartered in Mountain View, California.

Ditech Networks Inc. (NASDAQ:DITC) supplies voice processing equipment for telecommunications networks. The firm's voice enhancement and echo cancellation products enable communications providers to regulate the distracting echoes that can occur in long distance, satellite and cell phone calls. Its Voice over Internet Protocol products deliver dependable service across network security boundaries, without network restructuring. Verizon Communications Inc. (NYSE:VZ) and Sprint Nextel (NYSE:S) are among the Ditech's principal customers.

The firm pleased investors last week, when it reported Q3 EPS of nine cents and revenues of $22.1 million. Analysts had been expecting seven cents and $22.1 million. Management also guided Q4 revenues to $23.2 million ($22.8M consensus) and predicted gross margins of 67 percent. DITC shares jumped through 90-day and 200-day moving average resistance on the news and have since been consolidating the gain in a bullish "flag" pattern. Stocks frequently exit flags moving in the same direction they were traveling when they entered them. In this case, that would be to the upside.

Brokers recommend the issue with one "strong buy," two "buys" and two "holds." Analysts see an average annual growth rate of 25%, through the next five years. The DITC Price to Sales ratio (3.19), Price to Book ratio (1.29), Sales Growth rate (57.86%) and EPS Growth rate (0.00 to 0.09 yr/yr) compare favorably with industry, sector and S&P 500 averages.

Institutional investors hold about 74% of the outstanding shares. The stock is one of those used to calculate the S&P 600 SmallCap Index. Over the past 12 months, it has traded between $6.59 and $11.44. A stop-loss of $7.10 looks good here.

Larry Schutts is a contributing editor for Theflyonthewall.com and the Vice-President of Stockwinners.com.