1 Takeover Target, 1 Strong Buy And 1 Sell

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 |  Includes: AVGO, DELL, GLW, HPQ, XRX
by: Takeover Analyst

What follows is a list of technology companies with varying degrees of risk/reward. They cover a variety of industries: electronic office equipment, semiconductors, and telecom equipment. Ultimately, I am most bullish about Xerox (XRX), since I feel that the company can be taken over by the likes of Dell (DELL). Hewlett-Packard (HPQ) may be another suitor; but for now, the CEO has put acquisitions of Xerox's magnitude on hold. Corning (GLW) also provides an attractive contrarian growth story, since many investors are overly discounting the solid fundamentals and catalysts.

Xerox

Xerox trades at a respective 8.8x and 6.4x past and forward earnings with a dividend yield of 2.2%. Consensus estimates for Xerox's EPS forecast that it will grow by 4.6% to $1.13 in 2012 and then by 9.7% and 13.7% in the following two years. Assuming a multiple of 8.5x and a conservative 2013 EPS of $1.21, the stock would hit $10.29, implying 30.7% upside.

The stock is risky given that it is 60% more volatile than the broader market. If the economy recovers quicker than expected, this stock has significant room for higher risk-adjusted returns. I like the company's diversification across a variety of office functions, and I believe that it will benefit from going under an even more recognizable brand name. Integration into the non-core products of Dell and HP would, in my view, help both parties drive value creation.

Broadcom (BRCM)

Broadcom trades at a respective 22.7x and 11.6x past and forward earnings with a dividend yield of 1.1%. Consensus estimates for Broadcom's EPS forecast that it will grow by 0.3% to $2.90 in 2012 and then by 10.7% and 8.4% in the following two years. Assuming a multiple of 13.5x and a conservative 2013 EPS of $3.17, the stock would hit $42.80, implying 14.4% upside.

The company is trading meaningfully below several historical average multiples, like price-to-book, price-to-sales, and price-to-earnings. With management increasing the quarterly dividend by 11%, the leadership has demonstrated confidence over the fundamentals and free cash flow. With that said, I do not recommend investing in the stock; actually, I would consider selling it for now. There are more attractive tech picks that will bounce even more when the economy hits full employment…

Corning

Corning trades at a respective 7.7x and 9.1x past and forward earnings with dividend yield of 2.2%. Consensus estimates for Corning's EPS forecast that it will decline by 23.3% to $1.35 in 2012 and then grow by 10.4% and 1.3% in the following two years. Assuming a multiple of 12x and a conservative 2013 EPS of $1.44, the stock would hit $17.28, implying 27.6% upside.

The stock is exceptionally risky, however, as evidenced by my DCF model. I assumed that the top-line will trend from 7% to 5% over the next six years as cost of goods sold, SG&A, R&D, capex eat 54%, 15%, 9%, 14% of this momentum, respectively. I then factor in net increases in working capital and adjust for non-cash depreciation charges. Taking a perpetual growth rate of 3% and discounting backwards by 10% yields a fair value figure of $10.78. I do not believe that the stock will this low since the risk story has already been fully conveyed. The multiples are also bearishly low and have plenty of room to expand with the 1.4 beta. Accordingly, I highly recommend opening a long position in this undervalued gem.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.