Deep Value Technology Stocks for the Second Half of 2011 (ATVI, AMKR, ARRS, BRCD, IDTI, WFR, PMCS, SNDK, WDC)
Using the term “value stocks” in the same sentence as “I.T.” and “technology” can be a dangerous game. Still, many investors, particularly of the private equity acquiring type, do use basic value calculations in looking for a core business to acquire. We generally look at Technology “value stocks” as being companies that trade with low price-to-book ratios, those that can still have positive earnings ahead and those with low expected ratios for price-to-earnings. There are many more factors to consider in each of these and we have tried to outline the proper pros and cons in each.
The current list of 24/7 Wall St.’s Technology Value List for the Rest of 2011 is in alphabetical order: Activision Blizzard, Inc. (NASDAQ: ATVI); Amkor Technology, Inc. (NASDAQ: AMKR); Arris Group Inc. (NASDAQ: ARRS); Brocade Communications Systems, Inc. (NASDAQ: BRCD); Integrated Device Technology, Inc. (NASDAQ: IDTI); MEMC Electronic Materials Inc. (NYSE: WFR); PMC-Sierra Inc. (NASDAQ PMCS); SanDisk Corp. (NASDAQ: SNDK); and Western Digital Corporation (NYSE: WDC).
Generally speaking, technology value is under 2-times book value under is now under 12.5-times expected earnings. Except where otherwise noted, the source for all performance and financial data is Finviz.com. When you have Cisco, Microsoft, and Intel all trading at dirt-cheap earnings multiples, many investors may think that value and tech are immaterial. Another issue is that private equity firms generally look at other less capital-intensive businesses with lower R&D expenses.
Only two of these deep value tech picks are repeated from our “Deep Tech Value List from Late 2010” and the mix there will show some serious wins and some which remain in the value-trap category. The remaining two value picks and others from that list are higher than late in 2010, but one of those prior value picks is Kulicke & Soffa Industries Inc. (NASDAQ: KLIC) and it has nearly doubled since then despite facing woes around the time.
Activision Blizzard, Inc. (NASDAQ: ATVI) boasts a price to book value ratio of 1.28 to 1 placing it in the top-tier of these companies. The company’s $13 billion market cap ranks it first among this group of technology companies. Its 12.5 forward earnings multiple is makes it richest among these nine companies. In a recent trading session Activision’s shares closed at $11.38. Its 52-week price range is $10.16 to $12.46.
Activision is no buyout candidate by our take. The company has an incredible console and PC game line-up and it clearly wins in the MMORPG genre. Perhaps its biggest competition and threat today is “freemium” games that are sold to iPhone and iPad users or which are social-networking oriented games. It is even possible that Zynga is going to be valued more than Activision’s $13+ billion market capitalization. Activision has a consensus Thomson Reuters analyst price target above $14.00, a price not seen since before the tech sector and economy went into the tank of the recession. If Zynga’s market cap is magically going to be $15 to $20 billion with about one-quarter of the revenues, the true largest gaming stock is going to look like deep value.
Amkor Technology, Inc. (NASDAQ: AMKR) is in the unloved and somewhat boring space of semiconductor packaging and test services. As with many value stocks, it is probably cheap for a reason. Its shares are trading at a price to book value of 1.56 to 1 a middle-of-the-pack number among these companies. The company’s $1.2 billion market cap places it among the smallest of these companies. Its forward PE multiple at less than 6 is virtually the “leanest” and best among these companies. Amkor recently closed at $6.10. Its 52-week trading range is $5.05 to $8.49.
What is interesting is that the Thomson Reuters consensus price is $9.50, implying upside of more than 50%. It has effectively been trying to refinance its debt at lower rates, which will make its debt level less burdensome ahead. Fortunately, this company carries almost no value in goodwill and intangibles. Amkor was at point in 2007 worth some $16.00 per share and the company might be able use its interest savings for dividend payments. There has been consolidation in its space for bolt-on acquisitions.
Arris Group Inc. (NASDAQ: ARRS) is an equipment-maker for the broadband communications sector, and that means it sits in a peer group that is subject to good hits and bad misses. The company boasts a price to book ratio of about 1.41, placing it in the top-tier of these companies. The company’s $1.4 billion market cap places it in the lower tier of these companies. Its forward earnings multiple in excess of about 12 ranks it among the richer companies on this list, but still cheap against many peers. In a recent trading session Arris Group’s shares closed at $11.27. ts 52-week trading range is $8.16 to $14.49.
Arris offers no real yield as a safety net for income-oriented value investors. The company has very manageable debt and more than $620 million in cash. Arris is in the middle of a long-term range in the stock and offers no real dividend. There is value when it comes to traditional screens here, but historically it seems to be somewhere around Par for investors.
Brocade Communications Systems, Inc. (NASDAQ: BRCD) is one that is in the ripe spot for consolidation in networking and storage. It boast a price to book ratio of under 1.4 and many investors and some analysts consider this one to be bait for consolidation. Its market cap is about $3 billion. The company’s forward earnings multiple in excess of 11.5 ranks it among the richer companies on this list. Brocade shares posted a closing price of $6.25 in a recent session. The 52-week price range is $4.64 to $7.30.
One analyst recently laid out the case that Brocade should be acquired by Dell. Thomson Reuters used to have a consensus price target much higher and this one was worth $10.00 back in 2007. Arguably it is the poor-man’s Cisco, and that is keeping it from being a high premium stock right now.