Flash Alert Michael Murphy
Today I'm writing to tell you about two exciting opportunities that we now have for investment.
Silicon Image (SIMG), last Thursday, reported their December-quarter earnings, which fell three cents short. So, on Friday, the stock fell $2.93 from its Thursday close of $12.17. Let's see, that's a Price/Disappointment ratio of 97.7X. Let's hope they give us that kind of ratio on the excellent earnings that this company will produce this year and next year.
The December quarter was very good. The company reported record revenues of $87 million, up 42% from last year, and 29 cents a share compared to 15 cents last year. That was far ahead of the $79 million and 28 cents a share that I said I was expecting in last Thursday's Radar Report. But the reported results included a royalty payment from Genesis Microchip related to their recent patent settlement, which accounted for $11.8 million in sales and five cents share. Adjusting the results for this one-time event, operating results of $75.2 million and 24 cents a share fell short, so Wall Street killed the stock.
SIMG's March-quarter guidance was also a little light at $68 million to $72 million in sales, compared to the consensus for $73.2 million. But the March quarter is always light for consumer electronics. They guided above consensus for the year, which is more important. Management is looking for $340 million to $360 million in sales for the year, compared to the consensus for $343 million.
So let's recap. Excluding the Genesis royalty payment, sales grew 22.5% for the quarter and 33.3% for the year, and will grow 20% to 27% in 2007. Flat screen and high definition TV sales will only grow as the end of the analog broadcast signal approaches in February 2009. New media centers from Apple and others, plus the Windows Vista rollout, will spread Silicon Image's HDMI interface chips everywhere. Earnings will hit 75 cents or so in 2007, so the stock is selling for only 12.3X earnings.
This extreme sell-off is dumb. The company is starting a $100 million buyback program. Go thou and do likewise. Load up on SIMG -- build a full position (or even a little bit more) at today's giveaway prices. The buy limit on SIMG remains at $13 and the target price at $20.
Back Into Energy Conversion Devices
Energy Conversion Devices (ENER) experienced a similar fate last week. The stock was hit for $5.85 a share on Friday, knocking it under $30. If you recall, we sold ENER in January 2006 for a 119% gain, and were waiting for another opportunity to get back onboard. You can find my original write-up on the stock in the July 14, 2005 Radar Report. ENER is a leader in batteries for hybrid cars, solar panels and a new memory technology that Intel and other semiconductor companies have licensed. We bought the stock in July 2005 at $23.10 and sold it in January 2006 at $50.63, and I said we'd buy it back when it came down to more reasonable prices. That it did.
ENER's sin was the usual: Results a bit worse than expected, and guidance a bit lighter than expected. I have long thought that Wall Street analysts should be forced to run a start-up or development stage company for at least a year before they are allowed to publish research on them. These analysts come out of their MBA programs and treat everything like another case study. But then I realize that if they had any real world experience, they probably wouldn't kill stocks like SIMG and ENER on very small shortfalls, and run them up on very small above-consensus results. And that would take away much of our opportunity to buy stocks when they are down and sell them when they are overdone on the upside.
In this case, ENER reported December-second-quarter sales of $22.9 million and a loss of seven cents a share compared to a 19-cent loss in last year's comparable quarter. But Wall Street was expecting a low of six cents a share on $33.5 million in sales. Robert Stemple, the CEO of ENER and former CEO of General Motors, withdrew his forecast for sustained profitability by the end of the June quarter. The reason he gave was not a lack of sales, but rather a longer time to "secure additional funding opportunities for our emerging technologies." I believe the translation of that is that ENER needs to increase production capacity (again) and marketing activities in the solar business, and maybe find some more licensees for Ovonic Memory. In any case, they are going to trim some costs to produce smaller losses until they arrange their funding.
With all three parts of their business in the early, fast-growth stage, I am not that interested in whether they report a six-cent loss or a seven-cent loss for a quarter, or even whether they turn profitable in the June quarter or the December quarter. It is obvious that if we can buy this stock right, we will have another strong holding in the New Energy Technology MegaShift. Their United Solar Ovonics operation just doubled photovoltaic module capacity in the U.S. and signed a deal with a Chinese company to build a 30-megawatt photovoltaic plant in China. China is determined to make the 2008 Summer Olympics in Beijing the "Green Olympics," with solar power everywhere. I want you to buy ENER under $32 for a $55 target. It is probably safer to buy half a position immediately and then see if there is any follow-through to the downward pressure on the stock. You might get the second half in the mid-$20s, or you might have to buy it in the mid-$30s on the way back up. Either way, the position should be a big winner over the next couple of years. I'll update the fundamentals of the company in this week's Radar Report.
Sincerely,
Michael Murphy, Editor
New World Investor
