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Introduction

Netgear (NASDAQ:NTGR) is a technology company that emphasizes the development and production of wireless networking solutions for consumer and commercial markets. Netgear looks to be an amazing growth opportunity in the small cap space. Netgear was the largest gainer on the Standard and Poor 600 Small Cap Component on December 11th 2012.

Qualitative Analysis

Netgear Inc has a broad product line. Netgear Inc operates in both the commercial and consumer space.

Netgear commercial product offerings include: Ethernet switches, wireless controllers, internet security appliances and network attached storage.

Netgear consumer product offerings include: routers, gateways, IP telephony products, and media servers.

Netgear offers other products: wireless access points and range extenders, wireless network interface cards/adapters, Ethernet network interface cards and adapters, media adapters, power line adapters and bridges, multimedia over coax alliance standard adapters and bridges.

Historically Netgear experiences increases in net sales in the third and fourth quarter compared to other quarters. This can be an up-side catalyst as there has been strong consumer sentiment in this past retail season.

Technical Analysis

On December 11, 2012 Netgear experienced a sharp rally of 8.10%; this sharp move hit the upper-trend line of the multi-year trend line. The impressive move had nothing to do with media press releases, or earnings calls. I saw no notable analyst recommendation or upgrade on the stock.

I anticipate the stock to break above the channel on strong earnings, sentiment, and cyclical reasons (sales usually strengthen in Q3 and Q4 for NTGR).

(click to enlarge)
(Chart from freestockchart.com)

Netgear broke and remains above the 20, 50, and 200-day moving averages. The moderate-volume implies accumulation and limited trading.

Notable resistance areas are 41.50, 43.50, and 45.30 per share. 45.30 is the most important resistance area.

Street Assessment

Analysts on a consensus basis have strong expectations for the company going forward.

Growth Est

NTGR

Industry

Sector

S&P 500

Current Qtr.

-11.60%

31.90%

N/A

8.70%

Next Qtr.

-12.30%

82.80%

N/A

14.90%

This Year

-5.10%

-0.80%

68.70%

5.60%

Next Year

4.90%

48.80%

0.90%

13.20%

Past 5 Years (per annum)

23.42%

N/A

N/A

N/A

Next 5 Years (per annum)

20.00%

16.79%

17.71%

9.17%

Price/Earnings (avg. for comparison categories)

13.43

8.25

9.44

17.83

PEG Ratio (avg. for comparison categories)

0.67

0.18

1.04

0.28

(Table and data from yahoo finance)

The company shows great potential as analysts on a consensus basis have a 5-year average growth rate forecast of 20% (based on the above table).

Earnings History

11-Dec

12-Mar

12-Jun

12-Sep

EPS Est

0.64

0.68

0.69

0.65

EPS Actual

0.69

0.73

0.64

0.65

Difference

0.05

0.05

-0.05

0

Surprise %

7.80%

7.40%

-7.20%

0.00%

(Table and data from yahoo finance)

The average surprise percentage is 2% over analyst forecasted earnings over the past four quarters (based on above table).

Forecast and History

(click to enlarge)

(Table created by Alex Cho, data from shareholder annual report, and price history is from yahoo finance)

The EPS figure shows that throughout the 2007-2009 period revenues dropped as the company was adversely affected by the great recession. Once the United States economy exited the recession in 2010-2011 the company earnings have improved.

(click to enlarge)

(Table created by Alex Cho, data from shareholder annual report)

By observing the chart we can conclude that the business is cyclical and is affected by macroeconomics. Therefore the largest risk factor for Netgear is the slowing of international gross domestic product growth. So as long as the world economy continues to grow, the company will generate outstanding returns over a 5-year time span based on the forecast below.

(click to enlarge)

(Forecast and table by Alex Cho)

By 2016 I anticipate the company to generate $6.05 in earnings per share. This is because of their past growth trend, improving global outlook, and the continued success of their product offerings. The forecast is proprietary, and below is a non-linear chart indicating the price of the stock over the next 5-years.

(click to enlarge)

(Forecast and chart by Alex Cho)

Investment Strategy

Netgear closed at 38.45 on December 11th, and although the holiday season is coming to a close, it is likely that the winter sales will boost Netgear's earnings. I have a price forecast of 55.09 for 2012, being that there is only 18-days before the end of 2012. It may not necessarily hit that price target due to the short time frame. Which means we should move to the long-run, and focus on 2012-2013. In 1st quarter 2013, Netgear will announce earnings for 4th quarter 2012. Up until the earnings are announced, the stock should experience a strong run-up. I anticipate the stock to trade to around $55.09 to $64.42 implying a lot of upside going forward.

Short Term

Over the next couple months, the stock is likely to appreciate from $38.45 to $55.09. This implies 43% upside from current levels. The technical chart readings imply a strong up-trend in price action, which supports my price target. Therefore both the forecast model for fundamentals and the market sentiment incline me to recommend a buy at 38.45 and to sell at $55.09. However there are notable resistance areas along the way at 45.00 per share. A minor pull back at that level is likely.

I would sell the stock beyond $55.09 per share to pocket short-term gains in 2013.

Long Term

The company is a great investment, I anticipate NTGR to deliver upon the price and earnings forecast despite the risk factors (global economic slowdown). Netgear's primary upside catalyst is international growth, and growth in cloud products (enterprise network and storage). Therefore I anticipate the company to deliver upon my forecasted price target of $148.86 by 2016.

Conclusion

Netgear is a great investment opportunity. The growth forecast along with strong market sentiment reinforces my optimism in this small-cap stock.

Source: Netgear A Unique Opportunity In The Small Cap Space