Dolby, Badger Meter: Old Favorite, New Friend

I am starting to feel a little of what I would call the normal functioning of the stock market. I say this in regards to what, I would describe, as the normal response to news. That is, stocks report great earnings and the 'Street' responds with large news to the upside. In my book, this is what is supposed to happen, and for the last six months or so is something that has been relatively absent from the market action.

It was great to look at the list of top percentage gainers on the NYSE on Thursday and see Dolby (DLB) an 'old favorite' of mine make the list closing at $30.18, up $4.31 or 16.66% on the day. I first wrote up Dolby on Stock Picks Bob's Advice on January 7, 2008, and purchased some shares that I held for a short period of time. (I do not own any shares of Dolby nor do I own any options presently). At the time of my write-up, Dolby was trading at $49.21, so we can see the stock, along with the rest of the market, has been under pressure.

Let me explain why this stock and Badger Meter (BMI), a new name for this blog, deserve a spot on this website.

Besides making the list of top percentage gainers, the company did this with great news. Dolby reported first quarter 2009 results Wednesday evening, after the close. Earnings came in at $0.68/share, easily exceeding estimates of $0.43/share. Revenue also beat expectations, coming in at $180.3 million as compared to the estimated $164.9 million expected. To top this off, the company went ahead and raised guidance for 2009 earnings but did cut the outlook on revenue.

Alex Davidson over at Forbes.com pointed out that shares were upgraded to "outperform" over at Pacific Crest Securities and that analysts anticipate that Microsoft (MSFT) Windows 7 will significantly add to earnings.

What I really like about Dolby isn't about the fabulous products the company offers; I really like their numbers on Morningstar.com with its "5-Yr Restated" page.

I am impressed by the steady growth in revenue from $289 million in 2004 to $640 million in 2008. I like the earnings growth that has skyrocketed from $0.43/share in 2004 to $1.70/share in 2008. And their relatively steady outstanding shares which did grow from 93 million in 2004 to 112 million in 2006, but through 2008 stood at a barely increased 115 million shares.

Cash flow for this company is positive and solidly growing. The company reported free cash flow of $124 million in 2006 and increased it to $152 million in 2007 and $251 million in 2008.

The balance sheet is equally impressive with $395 million in cash and $297 million in other current assets. This total of $692 million, when compared to the $200.7 million in current liabilities yields a current ratio of 3.45. From my perspective, a current ratio of 1.5 or higher is solid. The company has a relatively nominal amount of long-term liabilities totaling $86.2 million.

Like virtually every other tech stock on the market, Dolby has been under pressure since early 2008 as this 'point & figure' chart from StockCharts.com demonstrates.

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The stock is far from overpriced and appears to have 'double-bottomed' at around $25. However, a price move above $33 would be more reassuring to me that this stock is showing any particular technical strength at all.

Reviewing some Yahoo "Key Statistics" on Dolby, we find that Dolby is a mid-cap stock with a market capitalization of $3.4 billion. The trailing P/E is only 17.36 with a forward P/E (fye 26-Sep-10) of 17.05. The PEG is a reasonable 1.12.

In terms of valuation, the Fidelity.com numbers suggest that the Price/Sales Ratio (TTM) is rich at 4.53 compared to the industry average of only 0.93. However, in terms of profitability, Fidelity reports that the Return on Equity (ROE) at 20.59% almost doubles the industry average of 11.11%.

Finishing up with Yahoo, there are 112.58 million shares outstanding but only 51.78 million that float. Currently there are 6.18 million shares out short (as of 12-Jan-09) with a resultant short interest ratio of 10.9 days. From my perspective, this is well above my own arbitrary three-day rule for short interest suggesting that Thursday's sharp price move might well have been a bit of a 'squeeze' of the shorts.

No dividend was paid and Yahoo does not report any stock splits.

Since I have gone on for some time about Dolby, let me briefly fill you in on the second stock I wanted to comment on--Badger Meter. I do not own any shares of this Wisconsin firm (I love those Wisconsin companies that show up in my blog - Go Badgers!)

On Thursday, Badger Meter made the list of top percentage gainers, when the company closed at $30.51, up $6.42 or 26.65% on the day (!). Basically, the company reported a terrific fourth quarter 2008 with solid revenue and earnings growth. The company also has a terrific Morningstar.com "5-Yr Restated" page with steady revenue growth, earnings growth and yes (!) dividend growth. The free cash flow results are incomplete on the page but the 2007 results show $12 million in free cash flow, and its balance sheet appears solid with a current ratio of about 1.5.

The 'point & figure' chart on Badger Meter from Stockcharts.com shows the stock price peaking at about $62 in August 2008, only to dip as low as $18 in November 2008. The stock price has been fighting back but like Dolby, I would like to see it above the 'resistance line' at about $32.

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In terms of valuation, according to Yahoo "Key Statistics," the stock has a trailing P/E of 20.94 with a forward P/E estimated at 19.81 (fye 31-Dec-09). This is a smaller company than Dolby, and is actually a small cap stock with a market capitalization of only $451.18 million.

According to Fidelity.com, in terms of valuation, Badger has a Price/Sales (TTM) ratio of 1.31 compared to the industry average of 0.77. The company is slightly more profitable than its peers are, as measured by the Return on Equity (ROE), which according to Fidelity comes in at 22.75% compared to the industry average of 20.17%.

Yahoo reports only 14.79 million shares outstanding with 13.66 million that float. As of January 12, 2009 there were 1.55 million shares out short ,representing 4.2 trading days of short interest, which is a little above my own 'three-day rule' for significance. As I noted, the company does pay a small dividend of $0.44/share with an indicated yield of 1.8%. Per Yahoo, the last stock split was a 2:1 split back on June 16, 2006.

If you read the Bob Herbert column from the January 29, 2008 edition of the New York Times, you might realize that the infrastructure stimulus might well include Badger Meter products in water projects (?). Anyhow, perhaps that is what the 'street' is thinking in dealing with this company!

Anyhow, I feel like more of my old self having found firms on the top percentage list that reported great earnings and are being rewarded for their financial success!

Disclosure: The author holds no positions in either stock.