May’s "Undervalued Stock of the Month"

We covered the “undervalued stock of the month” for April, so it seems only fair to do the same for May. This monthly report comes from the folks at Half Priced Stocks, and they’d like you to subscribe in order to find the answer.

That’s not the Gumshoe way, of course — we’ll just have to figure it out on our own.

So what do they tell us about this company?

It’s in the semiconductor industry.

Wait — before you run for the hills — they say it’s 27% undervalued.

They say this company is “trading at an enormous discount to its intrinsic value.”

“all you need to know is that this firm is a worldwide leader in its
space, designing the critical backbone components used to run everything from
computer modems to mobile phone handsets to next-generation DVD players.”

Customers include Apple, Dell, Cisco and Motorola. Not a bad list there.

Then we have the bla bla bla section — consumer electronic are growing fast, bla bla bla, everyone wants new TV’s and gadgets, bla bla bla. I think we all know that stuff.

Debt free, and $2.5 billion in cash — $4.50 a share.

“Investors have at times paid as much as $182 per share for the stock.” (I bet I know what times those were, too — I’ve still got the scars)

“still trading -80% below its all-time highs”

Profit in 2006 was $400 million.

So — they think this one is worth $48 a share … what is it?

All those numbers go straight into the new Thinkomitron, and out comes the answer …

Broadcom (BRCM)

So … we’ve probably all heard of this one. It was indeed a tech boom favorite back in the last decade, and it is down whatever 80% or so from those highs. It is profitable now, it does have about $4.50 a share in cash, and profit was just a hair under $400 million in 2006.

If it’s going to hit $48 a share ,that will be a nice ride — we’re just a bit over $31 at the moment. They have a ridiculously broad (no pun intended) array of products, including all the examples cited plus just about any other telecom or consumer electronics chip I can think of (not that I’m much of an expert on those specifics). They have been primarily cited in the past as an investment in networking chip solutions, whether it’s broadband enabling devices or wifi or bluetooth, so perhaps that’s where most of their business is … but (can you guess what I’m going to say?) I really don’t know.

Definitely a going concern, perhaps undervalued depending on how you look at it (if you pull out the cash, it’s trading at a forward PE of about 18 … but if you give me a horn, I look more like a unicorn — I have no idea whether they’ll do anything useful with that cash, but I bet they won’t refund it to you when you buy shares. The trailing PE is a less-compelling 57.)

So … certainly a growth business in the broadest sense (again with the unintended puns), lots of concern about pricing pressure and competition, forward PE that’s a bit of a premium to the overall market. And it’s a lot cheaper than it was in 2001. Undervalued? Maybe. Your call … but at least now, you know where to start.

The author will always disclose any direct long or short equity, debt or option position in any stocks written about as of the day of publication, and will not trade in any stocks mentioned for three days (72 hours) after publication. Full disclaimer is at the bottom of the page.

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Gumshoe’s Monthly Review

1. I did my own research on this company since at the time I did not know of “Stock Gumshoe.” The company I came up with based on the information given is NVIDIA(NVDA).

   [Reply]

   Posted by Geoff | May 24, 2007, 2:56 pm

2. Given…
   Industry: Semiconductors
   Current Price = $34.86
   5-Year Annual EPS Growth: +25%
   % Below 52-Week Highs: -25%
   $2.5 billion cash or $4.50/share
   2006 profits: $400 million
   PEG ratio > 1.1
   Almost 85% insider/institutional ownership
   Stock sold for $182/share at one point in history

   BRCD share price is too low I think, in the pitch it said $35 or so, BRCD is around $9

   I got NVDA as well.

   [Reply]

   Posted by Ahmad | May 24, 2007, 4:53 pm

3. Ahmad the Gumshoe came up with
   BRCM!!! Broadcom
   Not BRCD!!!!

   Just thought Id clarify for him.

   [Reply]

   Posted by Anonymous | May 24, 2007, 7:15 pm

4. Thanks for the other suggestions — BRCM actually did hit an adjusted $182 a share back in August of 2000 at it’s all-time high … I don’t believe Nvidia ever got much above $160, either split-adjusted or actual price, and NVDA also has significantly less cash — about $1.3 billion, or $3.60 a share according to Yahoo Finance.

   To poke a small hole in my argument, in the interest of fairness, if you don’t adjust the prices for splits and the like BRCM actually was well over $200 at its high seven years ago.

   I’m convinced that Broadcom is the best fit for this one, but I’m happy to hear other folks justify their opinions. And that’s not to say I don’t think NVDA is worth your time or money — what little I know about the company’s prospects is positive.

   Brocade (BRCD), by the way, though it’s not a semiconductor company, is cheaper than both of these based on the PE — but I’m still not personally interested in … and it’s getting clobbered today for some reason.

   Cheers,
   SG

   [Reply]

   Posted by One Guy | May 24, 2007, 7:31 pm

5. Whoops…
   BRCM does seem like a good fit. The price is similar, the outstanding shares ($2.5 billion/$4.50 per share = 555 million outstanding), 2006 revenue was $3.7 billion.

   It always seems there’s a little problem with every choice…

   The 52-wk high is just $37.50, at time of publishing, that would mean the stock was 7% below high, not 25%.

   The cash flow given was for last quarter, but from $2.5 billion, it is now $575 million. Guess they’ve been on a spending spree.

   Net income is closer to $350 million than $400 million. I guess they round up…a lot.

   About 74% insider/institutional ownership.

   Given these, I would still bet it is BRCM. Thanks for the correction!

   [Reply]

   Posted by Ahmad | May 25, 2007, 12:24 pm

6. I trade BRCM at $22-$25 last year. I don’t think it’s going to go much higher than $30-35. If it hits 25$ or below than it’s a buy, otherwise it has 50/50 chances to go either way.

   [Reply]

   Posted by Anonymous | May 25, 2007, 12:28 pm