Overdue for a compelling stock analysis, my selection today is Sigma Designs (SIGM). The once highflying designer of IPTV and Blu-Ray chips is an unnecessary casualty of this tech-hating stock bludgeoning bear market. I propose, in a market where players like Netflix can thrive and hold to their growth multiples, why can't a chip designer like this at least get a fair multiple? After all, most of this company's products end up outside the US. This is at minimum a $40 stock, and even fairly valued at $74. This, I believe is a play on market psychology and the desire of perhaps one big player to protect an unrealistically bearish and overexuberant short position (Sigma doesn't hold CDO squared positions).
This recent chart data tells a story of a 3 month ago earnings surprise, levitated largely by likely overordering in the 4th quarter of a major customer, then the following price deflation from both a falloff of a speculation top as well as perhaps some inside knowledge of this inventory situation. According to the March 12th earnings call, disappointing revenue guidance of 60M versus 76M gave the shorts a tad bit more confidence for at least a little while. This 16M miss was entirely caused by a major customer overstocking chips in the most recent quarter, needing some time to work through its inventories.
According to Sigma's guidance in last night's earnings conference call, revenues 60M for Q1 09 is expected, then resumption of previous trends are expected. In other words, we're still at a 300M-350M revenue prediction range with an expected profit margin of 50% for FY09.
Some on the napkin calculations (I'll leave the more precise predictions to the paid analyst community at large) reveal operating expenses likely at 56-60M with reduced legal and Sarbanes Oxley compliance costs and a 10M revenue line from interest income on their gigantic 275M cash position (not bad for a 706M market cap company).
At 50% margin for 325M, a midpoint, we conclude 162.5M in gross profit for FY09. Back out 56M for operating expenses, put back in 12M for interest/investment income, and back out 35M for taxes. We get 83.5M+ of net income against 31.6M shares.
That is a handsome $2.64 net income per share for FY 2009 on a $22.80 growth stock with a 46% y/y revenue growth assumption in businesses with plenty of upside. That gives a paltry forward PE of 8.63. A 30 forward PE realistic for an aggressive price target based (considering growth rate is 46%) on this revenue growth (half the full 45 multiple) gives you a $79.20 price target.
Lets say the bears (note this short interest equals 33% of the total stock's supply at 10M+ shares) are right and growth is done and next year's revenues are 240M? Keeping opex and margins the same, a definite bearish scenario, we get 120M gross profit - 56M opex + 10M interest - 25M taxes ... 49M net income. That is still nearly $1.55/share in earnings, or an 14.70 forward PE. Considering the economies of scale here, a 30 forward PE is more than justifiable considering previous year revenue growth was at a stunning 142% percent! That gives you a conservative $46.50 price target. Even a 25 multiple gets you a $38.75 price target. More than reasonable.
So there you go - price targets of $46-$74 in varying scenarios. With this recent short interest (and likely this is outdated considering recent down volume and institutional ownership on the stock, perhaps more than 10M shares are short now), pictured below, from Nasdaq Trader, I can't help but think someone needs to cover a giant position soon into big news. Can't hurt that by Friday a new 2M share buyback will be eligible. (note the buyback will change share counts down, so any possible lost interest will be more than offset by earnings increase per share)