Hello Friends! Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice! As always, please remember that I am an amateur investor, so please remember to consult with your professional investment advisers prior to making any investment decisions based on information on this website.
As I have written many times, there are probably two broad processes that are required to invest successfully. The first is identifying the stocks that belong in a successful investment account and the second is managing those stocks. I spend most of the entries discussing my ideas about the first and also share with you my success at implementing the second. I hope that you all find this helpful.
While some investment letters seem to pull names out of the air, I try very hard to explain my own philosophy and how I arrived at these stocks. Time will tell if this approach will be successful. If any of you use similar strategies, or if any of you have utilized my perspective in developing your own portfolios, I would greatly appreciate hearing how it has been working out for you and any changes that you have implemented. There isn't anything magical or mysterious about the names that I write about on the blog, they simply represent stocks of companies that I view as the highest of quality. For me quality is about consistency of good results reported with a background of underlying financial strength.
Let's take a look at a stock Dolby (DLB) that caught my attention. I will share with you what it is about this stock that I find provocative and why
DOLBY (DLB) IS RATED A BUY
First of all, I do not own any shares nor do I have any options on Dolby. But it is a stock that I would hope to have the opportunity of adding to my portfolio in the future, and if I did have a 'buy signal', it would be the kind of stock I would be buying today.
Dolby caught my eye when it made the list of top % gainers on the NYSE today, closing at $49.21, up $3.68 or 8.08% on the day. Scanning manually through the lists of top % gainers is the place that virtually all of my stock 'picks' originate.
What exactly does Dolby (DLB) do?
According to the Yahoo "Profile" on Dolby, the company
"...engages in the development and delivery of products and technologies for the entertainment industry worldwide. The company offers products comprising traditional cinema processors, digital cinema products, digital 3D products, digital media adapters, broadcast products, and live sound products, which are used in content creation, distribution, and playback. It also licenses a range of technologies, which are used in DVD players and personal computer DVD playback software; digital televisions and portable electronic devices; and consumer electronic products, such as gaming systems and audio/video receivers."
Is there any news to explain today's move?
The Consumer Electronics Show is being held this week in Las Vegas. Dolby has announced audio and image technologies that are being favorably received.
How did they do in the latest quarter?
On November 8, 2007, Dolby reported fiscal 4th quarter results. For the quarter ended September 28, 2007, revenue climbed 26% to $129 million from $102.1 million in the same period last year. Earnings climbed 75% to $44.2 million or $.39/share from $25.2 million or $.22/share last year.
These results beat expectations of $120.6 million in revenue and $.25/share in earnings. The company also raised guidance on fiscal 2008 to earnings of $1.27 to $1.37/share on revenue of $560 to $600 million. Analysts polled by Thomson Financial had been expecting profits of $1.23/share on revenue of $536.6 million.
In other words, this was a gorgeous earnings report imho.
What about longer-term results?
Reviewing the Morningstar.com "5-Yr Restated" financials on Dolby (DLB), we can see that revenue has been steadily increasing from $217 million in 2003 to $482 million in 2007. Earnings have also steadily increased from $.36/share in 2003 to $1.26/share in 2007. No dividends have been paid. Shares outstanding have increased somewhat from 86 million in 2003 to 114 million in 2007. This represents an approximately 30% increase in shares during which time the revenue grew by over 100% and the earnings increased by over 200%. This is an 'acceptable' level of dilution imho.
Free cash flow has been positive and growing with $66 million reported in 2005 increasing to $124 million in 2006 and $152 million in 2007.
The balance sheet as reported by Morningstar.com appears quite solid with $368.0 million in cash which by itself is adequate to cover both the $143.2 million in current liabilities and the $51.3 million in long-term liabilities combined. Calculating the current ratio, there are a total of $733 million in total current assets which when compared to the current liabilities of $143.2 million yields an extremely strong ratio of 5.12. (Generally ratios of 1.25 or higher are 'healthy').
In other words the Morningstar.com report is fabulous.
What about some valuation numbers?
Reviewing Yahoo "Key Statistics" we can see that this is a large cap stock with a market capitalization of $5.43 billion. The trailing p/e is rich at 39.12 with a forward p/e (fye 28-Sep-09) estimated at 29.82. The PEG ratio is also a bit rich at 1.83.
Examining the Fidelity.com eresearch website, we find that in terms of Price/Sales (TTM), Dolby is reasonably priced with a Price/Sales (TTM) ratio of 10.33 compared to the industry average of 36.84. Also on Fidelity, DLB compares favorably when profitability is examined, at least as measured by Return on Equity (TTM), Dolby comes in at 19.81% compared to the industry average of 6.10%.
Finishing up with Yahoo, there are 110.39 million shares outstanding while only 49.22 million of them float. As of 12/11/07, there were only 652,790 shares out short representing a short ratio of 1, and only 0.6% of the float. There aren't a lot of investors willing to 'bet' against this stock!
No dividends are reported on Yahoo and no stock splits are recorded either.
What about the chart?
If we review the "point & figure" chart on Dolby from StockCharts.com, we can see that the company last experienced technical weakness between March, 2005 when the stock traded at $25 until the end of September, 2005, when the stock bottomed at around $14.50. Since that bottom, the stock has stayed fairly true to the support line moving the stock nicely higher to the current level of $49.21, under the November, 2007 high of $53. The stock chart looks strong and not overextended to me.
Summary: What do I think?
As you know, I wouldn't be writing up this stock unless I liked it :), and I really like Dolby a lot. If only the market environment was a bit better and my portfolio generated a 'buy signal', this is a stock I would love to own.
To review, the stock moved sharply higher with some publicity surrounding a consumer electronics show in Las Vegas this week. Their latest quarter had everything I look for in a stock: strong revenue and earnings growth, beating expectations on both, and raising guidance! What I would call a 'trifecta plus'!
Longer-term, the picture is just as nice with steadily increasing revenues and earnings, relatively slower growth in outstanding shares, and nice positive and growing free cash flow. Finally the balance sheet is quite strong with enough cash on hand to pay off all of its liabilities--both short-term and long-term combined!
Valuation-wise, the p/e is certainly rich as is the PEG ratio. However, the Price/Sales per Yahoo is reasonable relative to similar companies and the Return on Equity is also stronger than the industry averages. There aren't a lot of short-sellers out there. Finally the chart looks strong.
On a 'Peter Lynch style of investing', I can recall my fascination with Dolby noise reduction in cassette players years ago. This is a picture of a 1982 cassette boom box by Hitachi with Dolby noise reduction:
But of course that was a long time ago :).
Finally, the chart is quite strong but not over-extended from my amateur perspective. There really isn't much I don't like about this stock except that I don't own any shares :(.
Thanks so much for stopping by and visiting my blog! If you have any comments or questions, please feel free to leave them on the website or email me at bobsadviceforstocks@lycos.com. I read all of my email but cannot answer every letter I receive.
If you get a chance, be sure and visit my Covestor Page where my actual Trading Portfolio is analyzed and compared to both other investors as well as the many trading indices. On SocialPicks you can also find out about the many other stock picks I have made during 2007 and 2008 and how they have all turned out. And if you still have time, please feel free to visit my Podcast Page where my mp3's are waiting to be downloaded to your iPod or mp3 player so that you can listen to me discuss many of the same stocks I write about here on the blog.
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Have a great week trading!
Bob