What follows is a list of technology companies with various degrees of upside. They cover a variety of different industries: communications equipment, semiconductors, and business processing outsourcing. While firms like Cisco and TI are mature, others, like Xerox, are struggling and may be potentially taken over. I find that all three of these companies offer much greater reward over risk given the strong secular trends in technology. This sector offers greater growth and growth stocks, which makes now - before a fully recovery materializes - an opportune time to make an investment.
Cisco (CSCO)
Cisco trades at a respective 14.6x and 9.5x past and forward earnings with a dividend yield of 1.7%. Consensus estimates for Cisco's EPS forecast that it will grow by 13.6% to $1.84 in 2012 and then by 7.6% and 8.1% in the following two years. Assuming a multiple of 14x and a conservative 2013 EPS of $1.95, the stock would hit $27.30.
This communications equipment firm is mostly a turnaround play. After all, the first quarter saw a 23% sequential decline and an earnings miss. With virtually all segments, save IP, down as margins trend south, the bar has been set low for high risk-adjusted returns. Even still, the company is nearer to its 52-week high than it is to its 52-week low. With a beta of 1.18, the company is, however, well positioned to gain back any lost shareholder value from greater consumer expenditures in technology.
Texas Instruments (TXN)
TI trades at a respective 19.8x and 12.8x past and forward earnings with a dividend yield of 2.2%. To value TI, I employ a DCF model. In this model, I make several assumptions: (1) 7.5% per annum growth over the next six years, (2) operating metrics in-line with historical levels, (3) a 2.5% perpetual growth rate, and (4) a discount rate of 8%. Based on these assumptions, I find the fair value of TI to be $35.42.
While the upside is not incredible with the company trading at nearly 15x free cash flow, risk is very limited. First quarter performance was slightly below expectations, but the semiconductor market appears to be recovering after supply-chain disruptions and exhausting delays. Even though, from a multiples perspective, there are cheaper semiconductors right now (ie. Intel (INTC) and Advanced Micro Devices (AMD)), TI has a wider economic moat than what the market appreciates.
Xerox (XRX)
Xerox trades at a respective 8.5x and 8.2x past and forward earnings with a dividend yield of 2.2%. To value Xerox, I employ a DCF model. In this model, I make several assumptions: (1) 7.4% per annum growth over the next six years, (2) operating metrics in-line with historical levels, (3) a 2.5% perpetual growth rate, and (4) a discount rate of 10%. Based on these assumptions, I find the fair value of Xerox to be $10.82.
While Xerox is synonymous with scanning, it has since become mostly a business process outsourcer (ie. BPO services). Earnings have been flat and would benefit from a greater client base to promote towards. This is precisely why I believe the company could be taken over by a larger suitor. Xerox can meaningfully catalyze free cash flow if it just reaches a global audience. Accordingly, I recommend making an investment in the firm as a potential takeover play.
Additional disclosure: We seek IR business from all of the firms in our coverage, but research covered in this note is independent and for prospective clients. The distributor of this research report, Gould Partners, manages Takeover Analyst and is not a licensed investment adviser or broker dealer. Investors are cautioned to perform their own due diligence.
