May’s “Undervalued Stock of the Month”

by Travis Johnson, Stock Gumshoe | May 23, 2007 7:42 pm

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[1], 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.

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