Art Samberg
Barron's: Art, what's wrong with this picture?
Samberg: All the winds at our back 10 years ago are now in our face. I'm not at all surprised by what's happening in the market, but it's getting a little thick. We are in a tough period for another year or two, though most of the initial damage has been done.
Q: How do you know?
A: I look at what I have known best historically -- technology. Last June I mentioned a company called SilverStream Software, then a $6 stock ("Dreams Deferred," June 25, 2001). It was selling at about cash per share. The company was introducing a Web-application software package called eXtend. Other people caught up, and the product has done all right, not great.
Q: Yet Novell just announced a deal to buy the company.
A: And they're paying $9. This has gone from a concept market to a value market. That's why I recommended the disk-drive stocks in January. It worked for a while, then stopped working. Now the stocks are at the absolute low end of their price-to-sales ratio. Maxtor and Western Digital are selling for 20%-25% of sales. There is always a seasonal slowdown in the tech sector, and the disk-drive makers will marginally miss the second quarter. But the stocks are unbelievably attractive.
Q: What else looks good in Techland?
A: In January I said Hutchinson Technology might be attractive in six months. It is, because it's a heck of a lot cheaper. Book value is just under $14 a share, and the stock is 15. The company has $10 a share in cash, though it has some convertible shares. It earned three cents a share last quarter, on revenues of $91.5 million. Hutchinson has 25 million shares, and a $395 million market value. It is selling for one times sales. The company makes the suspensions that hold recording heads over magnetic disks. Because of improvements in technology, the number of disks, or platters, in most drives has gone from three to one in the past five-six years. Therefore, the number of suspensions needed has declined. Hutchinson's revenues have been flat for five years. But the trend has bottomed. You can't go below one platter.
Art Samberg
Company Symbol Recent Price
Maxtor MXO $4.43
Western Digital WDC 3.90
Hutchinson Tech HTCH 14.70
Macrovision MVSN 12.36
Gemstar-TV Guide GMST 8.10
Northrop Grumman NOC 129.95
General Electric GE 29.70
Q: So much for growth-stock investing.
A: I don't think there will be much top-line growth. However, there are some interesting companies with growing revenues. I keep buying Macrovision, and have become a large holder. The company is a leader in developing copy-protection technologies for DVDs. It's got 50 million shares outstanding, and is generating revenues at an annualized $100-million rate. Last year it generated $35 million, or about $1.40 a share, in cash flow from operations. It's got $4.68 of cash per share. Strip out the cash from the stock price, which is around 14, and it's selling for $10. Three studios have signed up for universal protection of movie titles on DVD. Two studios select protection title by title. Warner Brothers did not copy-protect "Harry Potter," and this has some people concerned, but I don't think it changes the story. Macrovision has three new products coming. Earnings could grow in excess of 20%, and you can buy the stock for almost half the growth rate. If it trades up to one times growth, add in the cash and you're looking at something in the mid-to-high 20s. It's a nice return.
Q: What else looks good to you?
A: In a past Roundtable I talked about Gemstar-TV Guide International. Just about everything is broken at Gemstar, but the company has 45 cents a share in cash. A lot of that comes from TV Guide, which some people think will disappear one day. I don't know why that has to be true. The company's patent library is still very strong. Gemstar lost an International Trade Commission case, which is very convoluted. They also committed the sin of all time -- doing a barter deal. They made their $100 million in interactive-TV advertising revenue last year only by bartering away $20 million in advertising inventory. It disappointed people, to say the least. Anyway, the stock sells for around $8, or 10 times EBITDA, which is unencumbered by significant capital expenditures. The news flow will get better as they work through the ITC decision on patent infringement, which so far has been unfavorable.
In general, the market has reached a temporary bottom, but I don't like it. Now I own things like Northrop Grumman, which is dynamite. I started life as a defense analyst, so I'm going back to my roots.
Q: It's been that bad?
A: It is that bad. But everything is right at Northrop. The government is increasing spending on missile defense and homeland defense. The company just won a ship contract no one expected them to get. Northrop said it can earn $6.70 to $7.10 this year. They think they can grow 10% to 20% next year, so that would mean $8.50. The stock trades for 132. I love some other defense stocks, but I love Northrop the most. We are in for a long period of prosperity in this industry.
Q: After some pretty lean years.
A: I'm biting my tongue before I offer my next pick -- General Electric. I'm not usually associated with these kinds of things. The stock has fallen from 60 to 30. They said two-three weeks ago that their plastics business has turned decisively, that they have been seeing 30% increases year-over-year. NBC is starting to turn. The growth rate has come down, but that is because the power systems group, which is very long-cycle, had no place to go but down. This quarter is probably going to be the toughest, but the company thinks it's going to grow 13% next year. Yes, the balance sheet got stretched a bit, but to think that General Electric is going to have a huge problem because of its balance sheet is the same as thinking in 1990 that the Federal Reserve would let Citibank go bust. The Fed will keep rates low long enough for corporations to rebuild their balance sheets. And General Electric is still a jewel of America. At some point the stock is worth 40.
Q: Thank you, Art.
SAMBERG
Price Price Percent
Company Symbol 1/7/02 6/14/02 Change
Western Digital WDC 6.86 4.09 -40.38%
Maxtor MXO 7.17 4.76 -33.61
Read-Rite RDRT 7.73 1.63 -78.91
Hutchison Tech HTCH 24.41 15.65 -35.89
St. Jude Medical STJ 72.78 78.45 7.79
Varian Medical VAR 33.73 42.15 24.96
Amgen AMGN 55.69 40.18 -27.85
Hypercom HYC 6.50 6.01 -7.54 |
