QLogic: Cash Rich, Debt-Free, Undervalued

By now, my readers know what I like to see in an investment. I’ve formed an investment strategy around Joel Greenblatt’s primary statistics for finding undervalued investments. I like to see cash rich, no debt, high ROE and ROA companies. Today, I’ve added QLogic Corporation (QLGC) as one of my top undervalued picks.

QLogic Corporation supplies storage networking solutions and network infrastructure solutions. It produces host bus adapters; and Fibre Channel switches, including core, blade, and stackable switches.

Let’s take a look at the statistics:

Market Cap: 1.87 Billion
Trailing P/E: 19.49
Forward P/E: 14.12
Cash Position: 478.64 Million
Debt: 0
ROE: 12.44%
ROA: 11.10%
52-week range: $11.46-$22.94

The cash position of QLogic Corporation is 25.59% of the companies market cap. What’s more, Qlogic’s high ROE and ROA mean the company is still generating strong returns for shareholders. While competitors like Broadcom Corporation, Brocade Communications Systems, Inc., Emulex Corporation, and Cisco Systems, Inc. also enjoy strong cash positions, none of them contain as high a cash to market cap ratio as Qlogic. With the exception of Cisco’s higher ROE and ROA, all of the statistics for the companies mentioned above are worse than Qlogic’s.

The 52-week range for QLGC shows that Mr. Market is largely underpricing Qlogic, most probably due to an overreaction as the market convulses in wild directions. QLGC is currently trading close to its 52-week low. There are plenty of fundamentally weaker stocks in the technology and networking sectors with a better marketing story that are trading closer to their 52-week highs. All of this spells out undervalued for QLGC.

If the market rebounds, I expect to see a repricing of QLGC shares closer to the $15-$18 range in the short-term. I plan to pick up 1000 shares at or under $12.50.

Disclosure: The author owns no positions in any of the companies mentioned above.

Comments

[sslayton01]

I'm long this stock as of last week...I agree the downside is limited, and the net cash per share makes the forward EPS multiple look even more favorable. However, these guys missed a major turn in the road re the technology landscape, and they will be in the doghouse for a while w/ institutional investors. Also, considering the EPS growth reset, the shares don't deserve much of a multiple. Still, if the mkt pops (interest rates?) this stock should trend upward. If the shares move sideways, I'll write a few calls to pass the time.

[User 106344]

QLogic hasn't missed much in terms of technology, rather, they got out of the exclusively storage side of the business (that's what hurt revenues). But that was a good decision, IMHO, since storage space tends to be very low margin. Now, Qlogic is more focused on Infiniband and having complete end to end network solutions -- with high growth and higher margins. And there is growing evidence that it is possible for them to successfully compete with Brocade on the switch side of the business.