A Smart Smart-Car Play

Integrated Device Technology (NSDQ: IDTI) is working its way into the fast lane. The maker of semiconductors chips just closed in December on an acquisition of ZMDI, a smaller German counterpart selling chips to the high-growth smart-car market.

Nearly every function in a car today depends on an electronic system controlled by a semiconductor, instead of a mechanical process. Those systems must first sense data, then measure, process, integrate and analyze it.

Integrated attempted to penetrate the smart-car market in the past but was hampered by the carmakers’ notoriously difficult certification process. Eager suppliers can wait years before getting approved. CEO Greg Waters once lamented that some automotive certifications could take six or seven years. Luckily, ZMDI already is certified to provide products for both high-powered applications, such as a car’s drivetrain, and high-growth applications, such as infotainment.

Integrated has enjoyed spectacular success selling its communication chips as well as chips used in wireless charging pads. Revenue in the December quarter grew 18% and profits exploded 40%.

Earnings growth will decelerate to the mid teens as the company cycles through the introduction of high-margin products last year and as it integrates ZMDI, whose chips sell at slightly lower profits.

Yet we think Integrated is in better shape than ever. ZMDI’s relatively stable earnings help protect Integrated from the unpredictable, uneven growth in the communications chips business, which can swing sharply because of big orders from customers building out wireless towers.

Cash flow is up 42% for the past nine months, and the company has already issued convertible debt to fund the purchase of ZMDI. As the December quarter included less than one month of ZMDI’s numbers, we expect investor enthusiasm to return as this purchase begins to shine.

A recent pullback in estimates for the March quarter sent the stock down 20% to what looks like a bargain. Integrated should grow earnings at least 15% next year, with the stock rebounding to the high $20s.

Buy Integrated Device Technology up to $20.

Express: Back in the Groove

Not only did Express beat estimates for its October quarter, it recently increased guidance for the critical holiday quarter that will be reported on March 9.he apparel retailer Express, which struggled to move merchandise despite escalating discounts in 2015, has gotten its groove back. More sophisticated designs that appeal to young working women and men, and a draconian reduction in the cadence and depth of markdowns, has ushered in tremendous profits.

Earnings more than doubled in the first nine months of the fiscal year and are expected to grow 31% in the fourth quarter. The company should earn $1.42 per share for fiscal 2016 (ending in January), up 75%. Estimates for a mere 11% growth in 2017 do not appear to be updated for these positive trends.

Founded by retail legend Les Wexner, Express Inc. (NYSE: EXPR) was acquired in 2007 by private equity firm Golden Gate Partners, which took Express public in 2010. After growing slowly but consistently since its initial public offering, earnings hit a rough patch in 2014.

Weak consumer spending and uninspiring products increased markdowns and decimated profits. Like many retailers that cater to teens, Express floundered when it miscalculated the tastes of its fickle customers and ended up with overflowing sale racks. Heavy markdowns conditioned customers to buy only discounted clothing, and profits fell.

In 2015, the company’s new CEO, David Kornberg, a 15-year company veteran, announced that promotions would be used “more sparingly,” with shallower discounts. After the success of its new One Eleven line of women’s casual knit tops, the company kept its promise to cut back its heavy markdowns.

True to Kornberg’s word, Express eliminated five-day-long, 40%-off-everything sales and ran half the number of sale days in first-quarter 2016 than during the same quarter a year earlier.

The new policy retrained Express customers to stop waiting for sales. The lower cadence of markdowns also helped Express attract older customers eager to buy its pricier dress wear.

Although the company’s design team may deliver some lemons now and then, its strategy of ordering less inventory up front and leaving more dollars in the budget to chase popular items lessens the risk of big hits to profits.

Buy Express up to $19.

On Assignment On Sale

Earnings at On Assignment, the provider of staffing services, grew 35% last quarter and should grow another 18% this year. Yet the stock trades at only 10 times its 2017 estimates.

We love On Assignment’s (NYSE: ASGN) recent purchase of digital ad firm Creative Circle, which has a three-year 26% compound growth rate thanks to its success in this rapidly expanding industry. This creative staffing agency, one of the largest in North America, adds coveted digital marketers to On Assignment’s inventory of workers.

On Assignment has a long history of successfully expanding into new skill sets via acquisitions and then growing these businesses by cross-selling them to its current customers. One of its earliest acquisitions was the IT staffing company Apex Systems in March 2012, for $600 million.

Revenue growth slowed to 5.7% in the first quarter of 2015 due to a pause in demand from financial services, government contracting, and oil and gas customers. Nearly 50% of the company’s revenue comes from these sectors. However, organic growth skyrocketed in the following three quarters to between 14% and 20%, a testament to the underlying demand for contracted professional services.

Buy On Assignment up to $36.