Don't Give Up on Tessera Technologies

Jun. 2.10 | About: Tessera Technologies, (TSRA)

As you can tell by the ratings history chart below, Tessera Technologies (NASDAQ:TSRA) has been an Ockham favorite for quite some time. Their stock is having a heck of a day today up nearly 13% after raising second quarter revenue guidance to $74-$75 million from $67-$70 million previously. The improved outlook for the quarter which ends later this month is due primarily to increased royalties from its micro-electronics customers. If the company is able to achieve even the low end of the new guided range, it would represent sales growth of nearly 19% over this quarter a year ago.

Tessera is in the business of licensing miniaturization technologies, and such technologies are used in consumer electronics like smart phones and flat screen televisions.TSRA Clearly, business is improving at a better clip than originally anticipated, as consumer electronics are constantly trying to fit more “stuff” into smaller, sleeker packages. The company has grown relatively well aided by some savvy acquisitions in the last few years, but analysts have forecast that growth to stall on a full year basis this year (full year estimates call for sales to fall more than 5%).

We are reiterating our Greatly Undervalued rating as of this week’s report, which is our most bullish stance on a stock. According to our methodology, TSRA is trading well below its historically established ranges of both price-to-cash earnings and price-to-sales, even after today’s nice run. For example, in Tessera’s relatively short time as a publicly traded stock (going on 7 years) the company has normally traded for 30.1x to 51.4x times cash earnings per share. However, analysts are expecting TSRA to pull in about $1 in EPS this year, so it trades for just about 19x cash earnings at current valuations. The comparison is similar for price-to-sales as well.

We believe that this company has unjustly fallen out of favor with the market and can reasonably trade higher. Growth may be slowing in comparison to the last few years, but with nearly 2000 patents to its name, Tessera is not finished innovating and miniaturizing. We believe long term investors have not missed the boat on this stock; although, it would not hurt to ease into the stock after its 13% gain today.

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