Category: Value Investment

We all know the famous story of Levis Jeans. (http://inventors.about.com/od/sstartinventors/a/Levi_Strauss.htm) When the California gold rush was in full swing in 1853, Levi Strauss invented Jeans, which satisfied the demand of miners who wanted strong lasting pants.

Now, it’s the web gold rush. Companies (Apple, Microsoft, Amazon, Google, YouTube, Netflix and etc.) invested billions of dollars in smart phone, Internet TV, web games, cloud computing, video streaming and so on. All these businesses have to deliver their content or services via networks. Cisco predicts that the number of network-connected devices will be more than 15 billion, twice the world’s population, by 2015. In the fifth annual Cisco® Visual Networking Index (VNI) Forecast (2010-2015), the company also said the total amount of global Internet traffic will quadruple by 2015 and reach 966 exabytes per year. With this projection, the industry needs strong lasting networks, which mean scalable, liable and easy to manage networks.

The share price of Dolby is now at $49.84 with a PE of 19. There were $1022 million in current assets and $186 million total liabilities in its first quarter’s balance sheet, among which $148 million were current liabilities. What a balance sheet! Among it, cash and short-term investments were at $787 million, long-term investments were 347 million. Adding these together, it’s $1134 million in cash and investments. With 113 million shares, it’s almost $10 per share. That means the actual price for Dolby is at $39.79, low than $40. With this, the actual PE is now at 16. If you think that Dolby will grow at 16% annually in next five years, the current price seems reasonable.

To get into deeper on the valuation of Dolby, I used discounted cash flow method. With growth projection of 10% annually in next 5 years, Dolby’s intrinsic value per share is $56. Adding $10 per share from cash and investment, Dolby’s intrinsic value per share is $66. The current price of 49.84 is almost 25% discount of $66. The current price is actually predicting that Dolby will grow even slower than 5% annually in the next 10 years.

The very question is “Will the growth of Dolby be 10% annually or even slower in next 5 years?”

It’s a difficult time for investors. Europe is under the dark cloud of shaky government finances, while Chinese economy is either on the way to a hard landing or a short landing in the best case senario. On the other hand, the stocks are not expensive except the A shares in China. It’s the time to pick the right stock at good price. Life goes on, no matter what will happen temparary to the world economy. When it’s all over, a good company will grow stronger. And even over this uncertain period of time, they are keeping making more money and preparing for better time.

There is a big hoopla around Buffett’s most recent investment in North America’s largest rail company (by market capitalization): Burlington Northern Santa Fe (BNI, news, msgs). Suddenly railway companies become big stars around world. Any company related to railway got a rise on its price, even for the one not owning a single section of railway, on the Shanghai stock exchange. Well, a good investment for Buffett may not be a good investment for everyone. There are 2 reasons.