Shares of NETGEAR, Inc. (NASDAQ:NTGR) have a flat year-to-date performance. At $33.45 per share, the stock is trading at 5.2x the NTM EBITDA and 11.3x the NTM EPS, positioning for a possibly substantial upside based on the following five reasons:
1. Netgear is over-discounted relative to its growth potential. Analysts predict a solid growth ahead with revenues, EBITDA, and EPS estimated to rise at a two-year CAGR of 14.8%, 15.4%, and 8.3%, respectively, over the current and next fiscal years. That results in a low PEG of just 0.6x.
2. Netgear is also undervalued relative to its peers. Compared with other major network equipment providers in the U.S. (see below), Netgear's growth potential is relatively at par, as the estimated EBITDA growth is fairly in line, and the better revenue growth likely offsets the impact from a slower EPS growth. Although the firm has slightly lower profitability margins, its investment return metrics such as ROE and ROIC are substantially higher.
In addition, Netgear has a healthy liquidity position as it carries no debt and the high levels of current and quick ratios reflect a liquid balance sheet. One thing should be noted that about 29.1% of the $1.27B market capitalization is actually in cash. As such, the stock should at least warrant an in-line valuation. Nevertheless, the current price of $33.45 implies a substantial 19.7% valuation discount to both the peer average P/E and EV/EBITDA multiples (see below), which appear to be overblown.
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3. NTGR has a proven record of beating market expectations. Over the past five quarters, it has consistently beaten revenue, EBITDA, and EPS estimates by sizable surprises (see below).
4. Most of the financial estimates have solid upward revisions over the past 12-18 months, reflecting analysts' increasing confidence in the company's prospects (see below).
5. Analysts are generally bullish on the stock. Of the 8 performance ratings, there are 1 strong buy, 4 buys, and 3 holds. BWS Financial upgraded the rating to strong buy from buy in April. Barclays has also recently raised its rating to overweight from equal weight and target price to $45 from $40 citing that the firm is positioned well for the European market and will likely experience a solid demand going forward.
For all of the above reasons, I strong recommend acquiring the shares at the current price or selling out-of-money put options to establish a long position.
Comparable analysis table is created by the author, all other tables are sourced from Capital IQ, and all financial data is sourced from Morningstar, Thomson One, and Capital IQ.