Dolby: 8 Reasons This Stock Could Be Music To Your Ears

by: Bret Jensen November 27, 2011

The leader in sound technology, Dolby Laboratories (DLB), has been under pressure all year and has dropped over 50% so far in 2011. However, given its valuation, cash rich balance sheet and takeover potential, it has gotten much too cheap.

“Dolby Laboratories, Inc. provides products, services, and technologies for the entertainment industry worldwide. It designs and manufactures video and audio products for film production, cinema, and television broadcast industries; and provides services to support film production, television broadcast, and music production. The company is involved in licensing technologies in signal processing systems that enhance sound quality or enable surround sound in movie soundtracks, DVDs, Blu-ray Discs, personal computers, digital televisions, mobile devices, video games, satellite and cable broadcasts, and online streaming; and developing technologies for mobile devices for 3D, digital cinema, post-production, and LED backlit LCD televisions”. (Business description from Yahoo Finance)

8 reasons DLB is undervalued at $30 a share:

1. DLB is priced just above long term technical support level (See 5 Year Chart).

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2. The company’s balance sheet over $8 in net cash per share (over 25% of its market capitalization)

3. After falling over 50% in 2011, Dolby recently received its first upgrade in quite some time from Barrington Research, which slapped a $43 price target on Dolby.

4. Dolby will probably pop in late December as the headwinds from tax loss selling dissipate.

5. DLB is selling at the very bottom of its five year valuation range based on P/E, P/S, P/B and P/CF.

6. Despite growing earnings at better than a 22% clip over the last half decade, DLB has a five year projected PEG of .75 and is priced at less than 8 times operating cash flow.

7. With its brand name, patents, low valuation and cash rich balance sheet; Dolby could make a good strategic acquisition for a larger technology firm.

8. Dolby has a forward PE of 11 which is an over 50% discount to its five year average.