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Dolby Laboratories: A Undervalued Tech Licensor with Amazing 10-Year Historical Performance

December 30, 2011 | About:
Any value investors would get very excited when any good and decent companies got its stock price plunged back to bottom level of 2009. That is the case for Dolby Laboratories (DLB). In the global recession bottom of 2009, DLB declined from $45 to $25 per share level. And right after that, it moved up to nearly $70 in the beginning of November 2010. From that time, it experienced the sharp downward trend, now it is staying at $30 level.

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DLB is one of the leading global entertainment providers in the world with the history of 45 years. It provides the products, services and technologies used to capture and render a superior experience for consumers of entertainment content, regardless of how or where that content is enjoyed. The company generates revenue by licensing technologies to original equipment manufacturers (OEM) of consumer entertainment products and software vendors, and by selling products and related services to creators and distributors of entertainment content.

The core business of DLB is still licensing business, taking around 77-83% of total revenue continuously for the last three years 2011, 2010 and 2009. The OEMs licensed are based in 46 countries and the products are distributed in over 80 countries. The company has customers in a wide range of entertainment industries, from movie studios, cinema operators to film distributors, broadcasters, video game designers. One big customer is Microsoft Corp. (MSFT), accounting for 10-13% total revenue in the previous three years. Most of Microsoft revenue has been generated from the Windows 7 operating system.

In terms of balance sheet strength, any investors would be very pleased to see how conservative DLB with its financial structure. The equity takes a large amount in the total assets — 88.3%, with no debt at all. In addition, DLB is very liquid, with more than 50% in cash, in the amount of more than $940 million. That is why even with the market capitalization of $3.35 billion, the enterprise value is only $2.4 billion.

In addition to the conservative financial structure, the operating performance of DLB over the last 10 years is very pleasing as well. It consistently delivers positive revenue growth, operating income and net income.

USD million 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Revenue 162 217 289 328 392 482 640 720 923 956
Operating Income 1 48 68 84 130 187 287 364 429 430
Net Income 31 40 52 90 143 199 243 283 309


In addition, the gross margin, operating margin and net margin have all experienced substantial increases. The gross margin increased from 64% to 88%, the operating margin doubled from 21% to 47%, and the net margin shot up from 14% to 32%. And comparing with DLB’s competitors in the electronic components industry, DLB has the highest operating margin of 47%, whereas Corning (GLW) has 28.5%, Universal Display (PANL) has 27.3%, and DTS Inc. (DTSI) has 29.3%.

Coming to the cash generation position, DLB has been famous for cash generating ability, with increasing and positive operating cash flow and free cash flow since 2003.

USD million 2003 2004 2005 2006 2007 2008 2009 2010 2011
OCF 40 47 80 133 163 264 273 327 404
CAPEX -7 -13 -15 -8 -16 -14 -14 -37 -47
FCF 33 34 66 124 147 251 259 290 356




DLB seems to be a cash cow company. Any investors would be very pleased to invest in a company like that. So how about the current valuation? Currently, the market values DLB at 11.2x P/E, 2x P/B and 8.6x P/CF, whereas the average historical P/E, P/B and P/CF of DLB has been staying at 27x, 4.7x and 19.6x respectively. That somehow signals the opportunity of an undervalue position.

In terms of insiders, the executives do not hold the majority of shares in the company, and during 2011, the insiders have kept selling the shares out.

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Even with the negative signal of the constant sales of the 10% owner Dolby Ray, the fundamentals are compelling. DLB is a cash-generating machine, with a conservative financial structure, improving operating performance with high margins, and is valued at single multiples by the market. Currently, DLB can be considered to be one of the 5-star stocks to hold for the long-term, unless there would some change in the entertainment technology that drives the whole market in a completely different way.

This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk.

About the author:

Anh Hoang
Money manager into global equities, especially with US and Vietnam markets. CFA level 3 candidate. Lecturer for Stalla - CFA course in Vietnam

Visit Anh Hoang's Website


Rating: 3.9/5 (14 votes)

Comments

daveremington
Daveremington premium member - 2 years ago
Nice analysis, but what about the future? What are the technological risks (emerging competitive technologies), risks of market saturation, key competitors? What are the barriers to entry, etc.?
baby88gurufocus
Baby88gurufocus - 2 years ago
Also does the author realised that Microsoft who has been a major source of revenue for Dolby may (or will) stop incorporating their codecs in their upcoming Windows 8? While Dolby will have to compensate this by selling them to each Windows hardware manufacturer instead - what does the author if taken this into account. Thanks.

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