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Dolby Labs – Tune out the Static and Buy Dolby Laboratories [DLB] is an iconic name for those of us who grew up in the age of cassette tapes. Since eliminating that incessant hissing Dolby has moved into movie and home-theater sound systems, automotive, computer and video game applications and high-quality streaming sound for NetFlix, Hulu, cable and satellite broadcasts.
Dolby earned $0.50 per share in 2005 and is now expected to show $2.57 this year. That would be down a tad from 2011’s $2.75 but would still represent a very nice 414% 7-year gain. DLB peaked above $70 in 2010 and was $45.83 as recently as May 7th right after Microsoft [MSFT] indicated they plan to include Dolby technology in Windows 8.
I used Friday’s earnings disappointment ($0.48 v. a $0.51 estimate) and the subsequent dip to under $31 as a buying opportunity. At Friday’s close of $30.66 Dolby trades for below 12x the already tempered estimate for 2012.That compares with average P/E levels of 21.9x during the entire six years 2006 – 2011.
The current quote represents the second lowest valuation in Dolby’s publicly-traded history. The 2008 nadir of $24.50 came at 14.1 times EPS substantially lower than today’s. Brave souls who didn’t shy away from a “falling knife” and scooped up shares near the low watched it surge to $70 by 2010. Buyers who caught the blink-of-an-eye drop to last October’s low were rewarded with a chance at a 78% trading gain within seven months.
As of March 31 the company held over $1 billion in cash and had no debt. The brand equity and patent portfolio are both very valauble assets that do not show on their balance sheet. The growing trend towards mobile devices is likley to keep demand for high-quality noise reduction technology rising.
Risk/reward looks extremely attractive on this unique technology company. There are only 107.2 million (fully diluted) shares outstanding so any positive mood change is likely to send the shares right back up.
Morningstar calls present day fair value as $36 and carries a sell target of $48.60. Standard and Poors sees fair value as $45.80 with a close-matched 12-month goal of $46.
I purchased DLB shares in Friday’s session. A rebound to a still-below-normal 18 multiple would support a target price above $46.
The Trade: Buy Dolby shares for $30.66
Disclosure: Long DLB
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