Fabrinet Is Grossly Undervalued - Look For This Stock To Double

| About: Fabrinet (FN)
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There are still incredible bargains to be had in this market of stocks, and one of the most outstanding I've found is Fabrinet (NYSE:FN).

Fabrinet is a provider of precision optical, electro-mechanical and electronic manufacturing services to original equipment manufacturers (OEMs) of complex products such as optical communication components, modules and sub-systems. You are free to read more about what Fabrinet does on their website.

However, for the purpose of this article, I simply want to provide a simple way to calculate the fair value of Fabrinet's stock. This method is not my own, but I learned it as a paid subscriber to the Valuentum website.

1) According to the company's latest financial report, Fabrinet has a net cash total of US$165,649,000 (US$180,058,000.00 - long-term debt of US$14,409,000.00) which amounts to 4.66 per diluted share (35,583,000 fully diluted shares outstanding at the end of the Q2 2014)

2) As of February 3, 2014 Fabrinet's market capitalization (its total equity value) is US$655,438,860 or US$18.42 per share.

3) Adjusted for its net cash position, Fabrinet's equity value (independent of the excess cash on its balance sheet) is US$489,789,860

4) Using the assumption that Fabrinet should be trading for the same average P/E multiple as its peers:

  • Alps Electric's (OTCPK:APELY) P/E is 28,
  • Hon Hai Precision Industry's (OTCPK:HNHAF) P/E is 11.14, and
  • Oplink's (NASDAQ:OPLK) P/E is 31.90.

This gives us an average P/E of 23.6. To justify Fabrinet's price as of February 3, 2014, the firm's long-term annual earnings-per-share stream would have to be at least (divide its net-cash adjusted market capitalization by 23.6, or 489.8 million divided by 23.6) = $20,754,000.

5) Dividing US$20,754,000 by the 35,583,000 shares outstanding on a diluted basis approximates 0.58 cents in annual earnings per share. Estimates are for Fabrinet to earn $1.52 for FY14, ending in June of this year.

Based on the average P/E multiple of Fabrinet's peers of 23.6, Fabrinet's shares should be trading at $35.87. Even if we simply agree that Fabrinet should trade at a P/E of 15, its shares would still be worth $22.80 each.

Moving out further to FY 2015, (ending June 2016) estimates are for Fabrinet to earn $1.68 per share. A forward P/E of 23.6 would give us a share price of almost $40.00. If we want to be very conservative and use a forward P/E of 15, we're still looking at a stock price of $25.20/share.

This is a company whose stock is grossly undervalued by the market. I believe it's only a matter of time before the market will balance this out.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in FN over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.