Authentic: A Real Buy at Sub-IPO Price

The market didn’t take to kindly to PeakStocks.com portfolio recommendation based on AuthenTec’s (Nasdaq: AUTH) latest earnings release, sending shares precipitously lower in the days following what were largely stellar earnings from a rapidly expanding up-and-coming company.

The good news for us, is that this presents us an excellent opportunity to add shares of AuthenTec at discounted prices and further cost average our total position.

If you haven’t already, it’s time to put some money to work in shares of AuthenTec.

I don’t know when shares will stop their recent slide to new all-time lows, but one thing I am certain of: AuthenTec is a cutting edge company that continues to execute in an otherwise wickedly negative marketplace and in the face of continued consumer doldrums.

Very briefly, AuthenTec is the world’s leading provider of fingerprint sensors and solutions to the wireless, PC and Access Control markets.

I am initiating the Fifth (5) BUY recommendation of AuthenTec at or around $7.50 per share.

Here’s Why:

Time to Ride This Gravy Train

Continued Execution, With an All-Time Low Stock Price Make AuthenTec Shares Ripe for the Picking.

Not only can we get shares of AuthenTec far below their IPO price of $11.00 per share, but we also are getting one more year of operating results and profits to boot, whih has in turn made shares of AuthenTec much more reasonably priced as the company has further grown into its valuation.

The following are my reasons for recommending another purchase in AuthenTec right away:

• Stock Price: We’ll start with the obvious one. AuthenTec went public last year at $11.00 per share.

Since that time, they have met or beaten analyst’s earnings estimates every single quarter as a public company, become profitable for an entire year, and have now become cash flow positive in 2 out of the last 3 quarters, all the while increasing sales 50% year over year, AND expanding their gross and operating margins significantly.

At these levels, AuthenTec represents a bargain price for a company growing this fast, with increasing profits in this sort of economic downturn where most technology companies are facing severe headwinds.

• Valuation: You won’t get me to say that AuthenTec is dirt cheap, hopefully, it will never be, but with the recent decline, it has become what one would call a “fair” or reasonably valued company.

Remember that it is always better to buy an excellent company for a good price, then a good company for an excellent price.

High growth stocks like AuthenTec will never be “cheap” by any stretch of the imagination because they are growing so fast and deserve a premium, but within that benchmark, shares of AuthenTec are looking incredibly cheap, even for a fast growing company.

Some quick hits:

1. Current P/E based on 2008 earnings of $.18 per share: 40.61
2. Forward P/E based on 2009 earnings of $.42 per share: 17.41
3. Projected 5-year EPS growth rate: 32.5%
4. Current PEG based on 2008 earnings: 1.25
5. Current PEG based on 2009 earnings: .54
6. Using my Discounted Cash Flow model, I get a price range of: $8-10 per share
7. AuthenTec’s margins, growth,etc. are all higher than most companies in their peer group and industry

I won’t go into excruciating detail on every single valuation metric, but if you look at how fast AuthenTec is projected to grow this year (45.5%) and at next year’s sales (34.3%), on top of their expected Earnings Per Share growth of 133% into 2009, it’s not hard to justify that a company like this deserves a much higher premium.

I have always been willing to pay more for AuthenTec than you might otherwise for any other company because of its growth prospects and proven track record.

The nice part with today’s valuation is that now you don’t have to really pay any premium at all!

• Continued Company Execution: I wrote about this in much more depth in my last post concerning AuthenTec’s latest quarter.

Aside from a few blips in terms of their Average Selling Price [ASP] declining because of some one-time items and continued cost reductions, and a bump in their inventory in order to serve their rapidly expanding sales to new customers, there was little there that would alarm any investor, especially in light of the fact that AuthenTec has never missed earnings, and has often raised both top and bottom line numbers over the last year.

Everything that management has set out to do and accomplish, they have done, including launching 3 new fingerprint sensors, a new product packaging called TouchStone that enables AuthenTec’s sensors to be integrated into waterproof products and be more durable, and other enhancements including great margin expansion, and profits, all point to a business that is firing on all cylinders, even in spite of current economic forces.

You can read my complete company analysis from AuthenTec’s last earnings conference call here.

Bottom Line

Don’t be afraid of current market conditions!

While we can never predict bottoms, my cost-averaging approach to purchasing shares on PeakStocks.com has allowed us to get into AuthenTec at bargain prices while being patient for a turnaround in the overall market, and specifically, for a catalyst with this particular company.

I advise you to buy shares immediately, even if it is only your first position, and add to that position on anything below this level.

Remember, AuthenTec went public at $11 per share.

I never thought we would have the opportunity to purchase shares at or near these levels ever!

This might be one of the last times you’ll get that chance, don’t let it pass you by.

Comments

[DaveinHackensack]

If SeekingAlpha lets you edit this, perhaps you could add a brief description of Authentic's business. You may have already done so in a previous post, but for those who haven't read it, a brief summary would be helpful.

2008 Aug 03 07:05 PM

[Mr G]

Not sure how I found your site but I have bought GEOY and am looking for big future returns. I have marked you as a favorite and watch for your new insights daily. Good luck in the future and I hope you achieve all the goals you have set for yourself!

2008 Aug 03 10:13 PM

[Chris Fernandez]

Dave,

You are right, what happens is that SA strips away the links that I put to my research reports that fully address what the company does and all the prospects associated with it.

Sorry about that! I'll try and post more info in the future within the post to help explain what the company does.

Mr. G: Thanks for the kind words and feedback, I really appreciate it and am glad that I am able to serve, and help you find some good stocks.

Chris

2008 Aug 08 03:46 AM

[Square Circle]

I think you fail to cover some major points in this analysis, including:

1. Market size - PC market is well understood, and limited in size, due to a combination of factors, including lack of compelling use case for consumers (and enterprises, for that matter), and low price point. Mobile opportunity is much smaller but faster growing, and likely driven by m-commerce, which has been predicted to take off for years, and has limited adoption outside of Asia.

2. Competition - UPEK and Validity are formidable, while point product chip vendors always have to consider the threat from new market entrants (especially entrance through tech buys). See Sirf vs. Broadcom/Global Locate or look at Omnivision for examples of this. What is Authentec's sustainable competitive advantage? If you don't understand this, you better not invest. FYI, IP is a very limited defense (and is almost always fleeting in nature). If this ends up being a commodity product, good luck competing with the large IC vendors.

3. Valuation - you mention relative multiples (i.e. P/E vs. comps), P/E vs. growth and DCF as your methods for valuing the business, but fail to elaborate on the inputs for the DCF, and your ability to confidently forecast earnings in a nascent, and some would say, niche market. If the "E" and "E growth" are significantly lower, a compelling P/E doesn't really mean much. Analysts often are wrong, and always are conflicted, so it is poor form to agree without providing justification (3rd party research is wrong more often that the Street).

4. What do people misunderstand about the opportunity that leads them to value it incorrectly?

2008 Aug 10 09:00 PM