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.

Integrated Device Technology, Inc. (NASDAQ: IDTI) is in the spot of circuits for communications and computing and it is valued at about 1.9-times its book value. While cheap, it is actually the highest valuation on this list.  The company’s market cap is $1.1 billion, ranking it the smallest of these companies.  Its forward PE multiple is 10.3, slightly richer than average among these technology players.  In a recent trading session Integrated Device’s shares closed at $7.54.  Its 52-week price range is $4.82 to $8.74.

Despite its growth being at the bottom-case scenario of what the company thinks it can achieve, shares slid hard from $8.50 to under $7.50 in less than the last two months before the most recent bounce.  Thomson Reuters has a consensus analyst price target above $10.00, implying close to 30% upside.  Integrated Device Tech was also a $15.00 stock in 2007 and this one has struggled on and off not appearing solely like a value stock many times since coming public in the early 1990s.

MEMC Electronic Materials Inc. (NYSE: WFR) is hard to call because it trades like a solar company but its main business is silicon wafers for chip-makers.  It also makes silicon wafers sold to solar players.  Because it has an awful history of earnings reports, the company is effectively trading under book value with a price to book ratio of about 0.8 to 1.  Its market cap is about $1.9 billion and its forward price-to-earnings multiple is less than 6.5 and that is very low for the tech-value group.  MEMC Electronic’s shares were at $8.33 and its 52-week price range is $7.94 to $15.04.

You already know much of the woes… poor earnings trajectory, poor investor sentiment, and perhaps a misunderstood business model.  This has also screened as a value stock for well over a year and the fact that analysts have a consensus price target above $14.00 may be as relevant in reality as the fact that this used to be a $80+ during the peak of the energy and alternative energy bubble in 2007 to 2008.  The debt level is high with over $1.1 billion in long-term debt, which dwarfs its near-$900 million in cash and short-term liquidity.  What matters here is that business seems to be turning around again and there had previously been some insider purchases of stock.

PMC-Sierra Inc. (NASDAQ PMCS) is in chip solutions for communications and shares are trading at a price to book ratio of about 1.65, a middle-of-the-pack number among these companies.  Its $1.7 billion market cap places it among the lower tier of companies discussed here.  The company’s 9.4 forward PE multiple is a middle-of-the-pack number among these companies.  Shares of PMC-Sierra recently closed at $7.41 and its 52-week price range is $6.83 to $9.20.

Analysts only have a consensus price target of about $8.94 here, so its upside is not exactly screaming here.  There is also no dividend and this one came public in the early 1990s.  The big drop in share price and sentiment came earlier this year and it has only just recently started to show some signs of life after bouncing off of 52-week lows.  Cash and investments versus debt is very attractive but investors may find themselves struggling for any real catalysts.

SanDisk Corp. (NASDAQ: SNDK) is the largest independent flash memory player out there and it did not entirely escape that Japan cloud earlier in the year.  Its shares are trading at a price to book value of 1.61 to 1 a middle-of-the-pack number among these companies.  The company’s $9.75 billion  market cap places among the largest of these technology players.  Its 8.2 forward PE multiple is a middle-of-the-pack number among these companies.  In a recent trading session SanDisk’s shares closed at $40.49.  Its 52-week price range is $33.03 to $53.61.

SanDisk is the king of flash memory, so it wins and loses as the wind blows in the world of consumer electronics.  Still, its shares have grown and contracted enough that investors have done extremely well if they buy this when business is awful and have done great selling after periods of huge gains.  Its current historic price is neutral, no “grossly oversold” nor “grossly overbought” readings here.   It usually trades with a cheap multiple, and it already turned away a Samsung buyout offer when shares were worth far less than today.

Western Digital Corporation (NYSE: WDC) is in a virtual duopoly in the world of storage drives against Seagate and both companies often screen as value stocks.  There is a reason: 1 terabyte of storage can be bought for less than $100 at stores now and that has everyone fearful that margins will compress indefinitely.  There is also a fear that flash-drives will eat into the both Seagate and WD.  The sector is often considered a value trap now. Still, WD is all in the Apple stores for its external drives.  The dividend policy in storage also remains somewhat uncertain.

WD’s shares are trading at a price to book ratio of 1.55, cheap but not excessively against others here in the tech value group.  The company’s $8.3 billion market cap is also rather high. Its 9.2 forward PE multiple is a middle-of-the-pack number among these companies.  Shares of Western Digital posted a closing price of $35.93 recently and the 52-week price range is $23.06 to $41.87.  S&P Equity Research just slapped a “Sell” rating on WD.  A cloud is hanging over the acquisition of Hitachi Global Storage Technologies since the EC is reviewing the deal.  If that deal does close late in this year, then WD may not look as cheap on the books and may have a more bloated business.  So consider this one as “value, but…” in your analysis.  Still, this was considered one potential target before.

Value stocks are usually cheap for a reason.  Maybe business has stalled or maybe the opportunity has peaked.  The one common theme among many value stocks is a lack of catalysts.  Still, when it comes to M&A and it when it comes to long-term investing through good markets and bad it is the value segment that often outperforms the market or which holds up better when markets head south. If everything was running perfectly inside the companies or if there were no caveats then these would not be called “value stocks.”

As one investment manager said at The Value Investing Congress when asked about how she starts her screens for finding value stocks, “Actually, I usually start my screens by seeing which stocks have been hitting 52-week lows for a while.”

JON C. OGG