Two recent articles in Barron's have pointed out that the recent sharp correction has left many leading companies with enticing P/E ratios of 10 or lower. These include technology giants like Microsoft (MSFT) and Intel (INTC), and one of the articles says that these stocks are screaming "Buy".
Some of the large firms whose shares I hold in my portfolio tracked by "Globes", are also screaming "Buy" in my opinion, because they have a P/E ratio of lower than 10 but are growing at a very fast pace. These include Marvell Technology Group (Nasdaq: MRVL) and SanDisk Corporation (Nasdaq:SNDK).
Marvell will only report at the end of August about the quarter which ends at the end of the month, and as of now analysts predict it will more than double its earnings per share [EPS], and grow 40% in revenue.
SanDisk will report in two weeks, and it apparently grew significantly in its earnings per share, more than 100%, and in revenue, more than 60%.
Marvell reached the current low of below 10 in its P/E ratio because of the general correction in the stock market, and specifically because of the fear of a slowdown in the hard disk market, a market which generates more than half its sales. The collapse in the share price of Research in Motion (RIMM) after its latest earnings report hurt Marvell as well, because it sells the communications processors for all the Blackberry devices.
We'll know a lot more about the hard disk drive market next week, after we hear Intel's (INTC) results, and primarily its guidance. As far as Research in Motion, the results and guidance showed the opposite - that Marvell sells it a lot more processors, and so there does not need to be any connection between Marvell's share and the disappointing results by Research in Motion, which is facing difficulty in getting good prices for the Blackberry devices because of stiff competition from iPhones and Android devices.
In my opinion, investors are making a mistake when they do not give Marvell any premium for its expected entry into China in 2011, through its collaboration with China Mobile Ltd. (NYSE: CHL), the world's largest mobile telecommunications provider, based on number of subscribers. Already today, Marvell has quite a few design wins among device makers who sell to China Mobile, which should bring strong growth in sales of the unique smartphones that Marvell developed, and that is growth that is expected to continue for many years in the largest market in the world.
In contrast to Marvell, the recent drop in SanDisk shares has no specific explanation that is connected to its business or to being on the verge of financial reporting, just the sharp correction that hit the entire market. In general, it is hard to complain about a fall from a record of nearly $51 two weeks ago to $42, when the share was at $5 less than two years ago. Every rise from the level of $20-- seven months ago-- and up, has been accompanied by a wave of sales as it passed each milestone price on the way up. That is how I see the latest wave of sales after it hit the $50 mark.
On the other hand, a low P/E ratio of around 10, for SanDisk, and apparently even lower, on 2010 profit, is much better understood than that given to Apple (AAPL) or Marvell. The crisis of 2008 in the flash market is still fresh, and so is the concern of a flood of flash chips hitting the market next year, which is liable to bring again a crash in prices and profits.
Investors want to know with certainty that demand engines for flash, most of them at Apple, will be strong enough next year as well in order to consume the additional output that will arrive from the new large facilities that will be added to the market in the middle of 2011. Primarily this refers to Toshiba's Fab 5, Micron's plant in Singapore, and Samsung's plant, apparently in Korea.
Mellanox is also yelling
Another share in the portfolio which has fallen from a record high, and in my opinion is priced low today, compared to its high growth rate, is Mellanox Technologies Ltd. (Nasdaq: MLNX). Mellanox will apparently report on a Wednesday, in two weeks time, about a doubling of its earnings per share compared with 2009, and more than 55% growth in revenue. Despite that, it is traded at a P/E ratio of around 15 on its 2011 earnings, and a third of its valuation is cash, with no debt.
Mellanox published last week what was, in my opinion, one of its most important announcements in recent years. It reported that Google (GOOG) scientists recently presented switch-based solutions built with InfiniBand technology, which reduces energy costs by up to 85% in large data storage centers.
One doesn't have to use too many words to describe the importance of Google as a giant consumer of data storage in ten centers across the US and outside it. It is also known that one of the biggest problems that it has at these data centers is the huge electricity usage because of tremendous cooling costs. This announcement essentially says that, even if indirectly, Google is buying Mellanox solutions. Mellanox leads the InfiniBand sector, and there is no reason to publish the notice, which includes a quote by Mellanox CEO Eyal Waldman, if Google was not a customer.
Disclosure: Author holds shares as part of his portfolio tracked by "Globes".
Published by Globes [online], Israel business news - www.globes-online.com - on November 17, 2009; Reprinted on Seeking Alpha with permission
© Copyright of Globes Publisher Itonut (1983) Ltd. 2009