Don't say you weren't warned,
Dolby (NYSE: DLB) investors. Earlier this
week, I argued that based on its trailing numbers, and
anticipated growth rate, Dolby was no bargain. I urged Fools
to "stay neutral until you're convinced it's safe to do
otherwise."
Judging from the stock's 5% rise over the last two days,
few people heeded my advice. Now it's too late for them ...
but not for us.
Dolby takes a dive
Dolby reported its fiscal fourth-quarter and year-end
earnings last night, and the stock has already given up all
the gains reaped earlier in the week, diving to a 7%
loss:
So basically, investors seeking an excuse to take profits
today, after the stock's 64% climb off its January lows,
didn't need to look hard to find a reason.
This stock goes to 11. (Figuratively speaking.) (We
hope.)
But here's the good news: This sell-off is
greatnews for Dolby longs. Sure, Q4 didn't work out
so great. But check out the long-term story at Dolby. Over
the past year, we've seen:
recessionsince the Great
Depression.
Dolby now boasts $259 million in annual free cash flow --
a figure greater than its reported annual income under GAAP.
Viewed from one perspective, this means the stock trades for
18 times free cash flow. With analysts predicting only 14%
5-year growth at Dolby, that may look expensive. However, if
you net out Dolby's cash, short-term and long-term
investments totaling $941 million, and subtract its
negligible long-term debt, what you're
reallylooking at here is an enterprise valued at
barely 14 times free cash flow -- the very definition of a
fair price for a 14% grower.
Foolish takeaway
Now here's the kicker: Think to yourself -- who's going
to
replace Dolby as the leaderin digital audio? Tiny
DTS (Nasdaq: DTSI)? Not likely.
Sony (NYSE: SNE). Please! They've got their
hands full just trying to earn a profit, while fending off
Nintendo and
Microsoft (Nasdaq: MSFT) on games, and
everyone from
Panasonic (NYSE: PC) to
Philips (NYSE: PHG) to
Logitech International (Nasdaq: LOGI) in
electronics.
Simply put, today's sell-off has finally given us the
chance to own the premier name in audio entertainment at
price more than fair. To me, that's
an idea worth entertaining.
This article was originally published as
Dolby Goes Muteon
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