Of concern to me (and probably every analyst) was:
- Slightly lower margins (45%. 47% target going forward)
- Excessive operating expense in the form of stock option grants
- Decision, whether intentional or not, to no longer give much guidance. Little visibility.
- Because of no visibility, lack of confidence in revenue dependence on IPTV due to inevitable competitive pressures.
- Lack of near term (this fiscal year) success on Blu-ray.
- The obvious bear case going forward: FY 09-10-11 earnings will go into negative trend due to the above mentioned points, specifically from a drying revenue stream from simple inevitable market competition in the IPTV space, thus the below mentioned 12.33 FPE actually becomes anything you'd like to justify (imagine: $1.50, 1.00, .25 earnings for 09, 10, 11). My crystal ball does not say this, but I'm sure every short will argue this as their dominant case.
- SIGM is diversifying their product mix. You have potential for a win with just one new surprise of market acceptance in any of the product groups: Ultrawideband, Blu-ray, VXP's video processing products, DOCSIS 3.0 solutions, IPTV. Additionally, a substantial asset base lets them organically keep progressing with this diversification.
- The buyback has not been completed yet. 1.2m shares remain. Better per share numbers come with this.
- On the gross margin side, it is important to note that inventory from the VXP acquisition is booked at projected selling price, and this is impacting margin negatively in the short term. In other words, there is likely not substantial real (cash flow) margin pressure, and in two quarters or so we may be back towards 50%. A situation where inventory accounting methods present a picture that is starkly different than cash flow tells.
- Book value of about $10 still remains. This provides a floor. Anything above is where extrapolations on growth trends will occur.
- Even if you had $200M of revenues and $1.50 of earnings, that gives a 12.33 forward PE. If projections are flat year over year performance (versus trending negative), this supports the stock.
- Actually bullish price action on Friday. One can speculate that the short thesis has played out in the near term and shorts finally have a way to cover into large selling now that the unknown is... now confirmed. I can think of a lot better ways to use capital than to force an extra $2 out of the stock. That is 10m shares of buying support. In this case, 'buy the news' as the news is bearish.
- Anyone who owns now has faced these realities fully, and will not as easily part with their shares. The April 2008 Tristan Guerra downgrade call pushed these same issues when the bulk of the longs including myself had not expected such negatives in the face of what was then 325M FY guidance. Now expectations are very different.
On one side you'll have the 'value' justification and on the other you'll have fear of declining earnings and no products left to sell in the future. I am holding my current losing long stock position (I held an options strangle into earnings: I sold the put side. It paid for losses on the call side, so it turned out a wash. Now I own free calls), but will take a wait and see approach. The market sentiment has shifted: the contrarian view (from a fundamentals side) on SIGM is now long.
The counterintuitive way in which these markets function suggests that it may pay to be patient for a long, despite the likely consolidation phase ahead of us. I will be a new buyer at $14 (and recommend this as a strong buy target to new investors) with lower price targets in mind. Call buyers might give it a shot here at 18.50 however.
Disclosure: Long SIGM