By Matt Doiron
Rovi Corp (ROVI) is a $1.4 billion market cap company which makes a variety of software products including interactive program guides and programs for delivering video content. Glenview Capital, a hedge fund run by former Omega Advisors trader Larry Robbins, filed with the SEC on Monday to declare ownership of 7.9 million shares of Rovi's stock, giving the fund over 7% of the shares outstanding. Glenview had initiated its position in Rovi in the first quarter of the year, and had only 700,000 shares at the end of March (see the rest of Glenview's portfolio).
Other hedge funds had reported positions in Rovi in their 13F filings at the end of the first quarter. Doug Silverman's Senator Investment Group had initiated a position of an even 2 million shares in Rovi and Daruma Asset Management, a fund managed by Mariko Gordon, owned 1.6 million shares after slightly decreasing its position from the beginning of the year (find other stock picks from Daruma Asset Management). A number of insider sales took place at Rovi earlier this year, though one of the filings reporting these transactions claimed that some of the sales were taking place to cover tax withholding from the sale of restricted stock. It should also be noted that the stock is down 46% this year, and down about 60% from the last round of several insider selling incidents in March. While the insiders were right to sell at that time, the stock price has fallen enough that it may be a good value now.
Wall Street analysts expect strong growth from Rovi. The company is unprofitable on a trailing basis but carries a forward P/E of 6.4 and a five-year PEG ratio of 0.6; these numbers indicate that if Rovi can meet the growth trajectory that sell-side analysts expect, the current stock price should prove to be an excellent value. In the company's 10-Q for the first quarter, it reported revenue increases of 14% compared to the same quarter the previous year, with revenue increases coming from all three business segments. However, costs- notably R&D- had risen as a result of increasing the company's headcount and margins had collapsed, with the company reporting a net loss of four cents per share. This was down from a gain of 15 cents per share in the first quarter of 2011. In order to meet analyst estimates, obviously, Rovi will have to start generating more revenue. Potential investors should also note that the stock's beta of 1.6 indicates that it tends to move a greater amount than the broader stock market, meaning that statistically it would fall by more than the major indices in the case of a slowdown in the U.S.
Rovi's two closest competitors, Boxee and Roku, are privately held. It does compete with Google (GOOG), which has a forward multiple of 13 but which investors can be far more sure will successfully turn a profit over the next several years. We would see no reason to recommend Rovi against the search engine giant. Rovi can also be compared to TiVo (TIVO) and Sony (SNY), which also provide interactive interfaces for consumer electronics. TiVo is unprofitable on a trailing basis and is not expected to be profitable next year, even as it sees strong revenue growth. Sony, which has a number of other product lines including consumer electronics themselves, is also unprofitable on a trailing basis. It is expected to generate earnings on a forward basis, with a P/E of 36. We don't see Rovi as a value stock and certainly don't see anything in particular about the company that would clearly justify a steep growth path if it has trouble growing its earnings compared to a year ago.
Rovi reports its earnings on Thursday, August 2nd. Analysts expect earnings per share of 21 cents. We would advise investors to at least wait until then before deciding whether or not to mirror Robbins's position.