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Last month I had short listed few stocks from my watch list that looked cheap compared to their quick valuation. After looking at the stocks in-depth I was able to come up with the final five stocks I would submit as my Entry for Portfolio with purpose. These stocks appear most undervalued compared to all other stocks in my watchlist.
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STOCK#1 - GAMESTOP : The business economics is fine , compared to other specialty retailers as it employed just around $200 million working capital and its total book value was $2.2 billion and Free cash flow (FCF) was $500 million , thus the ratio of FCF to Equity was 22%. It suggests that the company is doing a great job using shareholder’s equity. The moat of the business are its 6,000 odd stores that helps it closely connected with its customers and helps in its model of trading software games. Plus its domain knowledge is evident by the popularity of the Game informer magazine that has 7 million subscribers. On the flip side, the sales growth in future will be negligible because the business is somewhat saturated . Thus the management is forced to enter other markets like the used wireless hardware markets. These are highly competitive and don’t align with the company’s present domain. v) Management’s record in acquisition is not that great , given its recent $627 million impairment charge. FACTOR OF SAFETY Thus I would go with the factor of safety of 35%. This means that I would not pay more than 65% of the calculated fair value of the stock , which was $50 / share. Thus I would only buy if the stock is trading below $32.50 / share.
STOCK#2 - VEEVA SYSTEMS : IDC estimates that life sciences companies spent $44 billion on technology in 2012, $28 billion was spent on Software and Services and $16 billion was on Infrastructure. According to Gartner $396 million was spent by businesses in 2012, the largest area of spending was vertical specific software constituting $110 billion or 28% of total software spending. Total market for Cloud based CRM solutions for life sciences industry is $5 billion. Searched Youtube for any product demonstrations. Interestingling I found that a company called “Birst” uses Veeva’s platform to provide analytics to a drug sales rep. This is when I figured out that Veeva is more of a platform competing with Salesforce.com. Even though the company generated $40 million of operating cash in 2013 , still I baselined the FCF as $100 million because of large expenditures of around $100 million on R&D , Sales & marketing that were increasing the earning power and hence can belooked as capital expenditures. Most of the company’s new customers just try out the product with limited users. Thus the business has huge potential to grow within its existing customers. FACTOR OF SAFETY : The initial analysis gives us a factor of safety as 25%. But the company is heavily dependent on Salesforce.com Refer to this post for details Adding this dependency brings the overall factor of safety to 50%. Valued the stock originally at around $40 / share , thus would buy it anywhere below $20/share.
STOCK#3 - CIRRUS LOGIC : Cirrus logic’s single largest customer is Apple , accounted for more than 73% of its sales. The company develops high precision analog and mixed signal integrated circuits for a broad range of audio and energy markets. Net sales have steadily increased from $220 million in 2010 to $714 million in 2014. But last 1 year sales have decreased since peaking at $809 million in 2013. First six months of 2014 have been somewhat transformative for the company. Its revenues increased from $345 million in 2013 to $362 million in 2014, gross profit declined from $178 million to $175 million. Operating expenses jumped from $96 million to $141 million because of increase in R&D , SG&A and acquisition costs, thus operating income reduced from $82 million to $33 million. On top of it the company had other expenses of $11.5 million. Thus net income dropped from $54 million to $11 million. Wolfson Acquisition : This has been the highlight of the company in 2014. It spent $441 million on the acquisition , because of which the company now has debt of $226 million and its Goodwill jumped from $16 million to $265 million. The track record for acquisitions in Tech sector is not glorious. Goodwill impairment is a norm and not a surprise. But in this case I am positive. Wolfson is a leader in audio software for smartphones. Wolfson was publicly traded in London. I looked into its recent annual report to get a sense of its business. The company has pioneered the audio hub concept and is ready to bank on the emerging trend where the audio component is an independent entity and a product differentiator for Smartphone manufacturers because of the increased use of voice recognition software. The company is also going to benefit from the MEMS microphone trend. But I am also somewhat cautious because there are some technical intricacies surrounding its product line. As per the annual report the company increased it revenues with Samsung by 50% in 2013, but its overall share of Samsung Smartphones fell significantly. This was due to Samsung deploying a third party LTE platform which includes a separate audio solution rather than using its own Samsung Exynos processor , alongside which a Wolfson audio hub sits. Cirrus is positive about this trend reversing because the Samrtphone manufacturers are getting comfortable with experimenting their own solution in the LTE space. FACTOR OF SAFETY : Looking at the upside and downside I would give a factor of safety of 25%. Thus would be fine to buy the stock at below $22.
STOCK#4 - OMNIVISION : Omnivision designs develops and markets semiconductor image sensor devices. It is a company engaged in cutting edge technology as described in its 10-K report.
CameraChip image sensors
All traditionally designed CMOS image sensors capture light on the front side of the chip, so the photo-sensitive portion has to share the surface of the image sensor with the metal wiring of the transistors in the imaging pixel and the metal wiring acts to limit the amount of image light that reaches the photo-sensitive portion of the image sensor. This type of pixel architecture is referred to as the front side illumination, or FSI, architecture. Our FSI products that are currently in production are based primarily on the OmniPixel3-HS™ pixel architecture, which we introduced in February 2008. In April 2014, we introduced a new FSI pixel architecture, the OmniPixel3-GS™, which is a global shutter pixel architecture capable of capturing smear-free images.
In May 2008, we announced a new approach to CMOS image sensor design we call OmniBSI™ technology. OmniBSI technology is based on an idea called back side illumination, or BSI. With our OmniBSI architecture, the image sensor receives light through the back side of the chip. As a result, there is no metal wiring to block the image light, and the entire backside of the image sensor can be photo-sensitive. Not only does this enable us to produce a superior image, it also permits the front of the chip surface area to be devoted entirely to processing, and permits an increase in the number of metal layers, both of which result in greater functionality. Capturing light on the back side of the image sensor also allows us to reduce the distance the light has to travel to the imaging pixels, and thus provide a wider angle of light acceptance. Widening the angle of light acceptance in turn makes it possible to reduce the height of the camera module, and thus the height of the device which incorporates the camera module.
Since 2008, we have continued to refine our BSI technology. In February 2010, we announced our OmniBSI-2™ architecture which represents our second-generation BSI technology and enables us to design imaging pixels as small as 1.1 µm in dimension. In January 2012, we introduced new image sensors based on OmniBSI+™, our improved 1.4 µm OmniBSI architecture.
In November 2013, we launched our PureCel™ image-sensor product line. Our PureCel sensors are based on advanced technology platforms and updated pixel array architectures and designs. Compared to our OmniBSI-2 based products, our PureCel products have increased unit area light sensitivity and lower power consumption.
CameraCubeChip Technology
In February 2009, we announced the introduction of our CameraCubeChip technology. This is a three-dimensional, reflowable, total camera solution that combines the full functionality of our CameraChip image sensors and wafer-level optics in one compact, small-footprint package. Our CameraCubeChip devices can be soldered directly to printed circuit boards, with no socket or insertion requirements. We believe our CameraCubeChip solution can streamline the mobile phone manufacturing process, thus resulting in lower cost and faster time-to-market for our customers. Although currently our customers primarily use our CameraCubeChip devices as secondary cameras in mobile handsets, going forward we anticipate that they will be used as the primary cameras in mobile handsets as well.
Other
In March 2010, we acquired Aurora Systems, Inc., or Aurora, a privately-held company incorporated in California. Aurora is a supplier of liquid crystal on silicon, or LCOS, devices for use in mobile projection applications and high definition home theater projection systems. With the acquisition of Aurora, we acquired advanced image projection technology to capitalize on trends in the emerging video-projection consumer market.
All this the company has achieved by taking on very little Goodwill. Its latest balance sheet as of Oct-31-2014 shows just $10.22 million in Goodwill for a total asset base of $1.44 billion. Plus the total liabilities were just around $360 million.
FACTOR OF SAFETY : With a strong balance sheet, steady cash flow and a potential for its market to expand (the automotive market) , would give 20% factor of safety. Valued the stock at $30 per share , would be interested in buying it below $24 per share.
STOCK#5 - INVENSENSE : The foundation of their MotionTracking devices is their patented fabrication platform, which enables integration of standard MEMS with CMOS (also known as CMOS-MEMS) in a small, cost-effective wafer-level solution. Combining a MEMS wafer with an industry standard CMOS wafer reduces the number of MEMS manufacturing steps, and enables wafer-level testing, and the use of wafer-level packaging, thereby reducing back-end costs of packaging and testing and improving overall product yield and performance. In addition to their CMOS-MEMS process, they have developed low-cost, high-throughput proprietary test and calibration systems, which further reduces back-end costs. They have pioneered a technological breakthrough in high-volume manufacturing of low-cost, high-performance MEMS motion processors. Combining this unique high-volume fabrication capability with their other core proprietary technologies, they are able to deliver our MotionTracking devices with industry-leading integration and cost-effectiveness. Fabrication platform enables the integration of multiple motion sensors, such as gyroscopes and accelerometers, on a single chip with processing capability. Their latest generation of MotionTracking devices have both an embedded three-axis gyroscope and three-axis accelerometer on the same chip, enabling integrated six-axis motion interface functionality. As a result of integrating multiple sensors, their products can eliminate the traditional calibration steps required with discrete solutions as well as offload the intensive motion interface computation requirements from the host processor. Over time, they believe they can integrate more advanced features and functionalities into their solution. Most MEMS devices are manufactured in proprietary in-house fabrication facilities utilizing numerous fabrication steps, esoteric substrates and MEMS-specific manufacturing processes that are not compatible for integration with standard CMOS fabrication processes. Their patented fabrication process allows them to utilize a fabless business model without relying on specialty foundries for MEMS manufacturing. Their fabless model enables cost-effective, high-volume production and provides them with the flexibility to quickly react to their customers’ needs. Additionally, their ability to perform wafer-level testing combined with our close collaborative relationships with third-party foundries enables them to better control the manufacturing process and product yields, resulting in lower cost and improved device performance and reliability. Their Audio technology includes three core components: MEMS elements designed specifically for high-quality audio sensing; ASICs—the circuits that take the raw sensor output and process it for transmission; and packaging technology, which is a very important part of the acoustic design of the microphone. InvenSense is one of the few microphone suppliers that develops all three components of the entire microphone, giving them better control of the overall acoustic system. This advantage allows them to better support their customers’ needs and deliver differentiated products to market. I have also found that Invensense is not just a hardware company. It has actively collaborated with Google in helping it develop Android’s capabilities towards developing applications related to motion sensors. Their MotionApps platform enables device manufacturers with limited motion interface experience to rapidly incorporate higher level motion-enabled applications in their products. After looking thru the company’s business model , it seems the business is increasing its intrinsic value by working closely with Google Android and help propagate its solution. Six months ending Sep-2014 , the company has grown its revenues from $126 millions to $156 millions , but has dipped in red because of increased expense in R&D and SG&A. The company has also gone in some acquisition spree increasing its Goodwill to $139 millions from $50 millions. FACTOR OF SAFETY : Would give a 20% Factor of Safety, valued it at $16.67 / share, would love to buy the stock below $13.35 per share. |
