From Barron's...
Rich and Reviled
Tech stocks with fat wallets but thin stock prices get no
respect, but maybe some should
By ANDREW BARY
Call them the living dead or cash-rich bargain stocks. They are technology
companies whose share prices have been savaged in the brutal bear market of the
past 30 months and now trade at or below the value of the cash on their balance
sheets.
These former investor favorites include Commerce One, Corvis, Sycamore
Networks, and Tibco Software. Some value-oriented investors are attracted to
them because their businesses essentially can be purchased free or at a negative
implied price.
Investors in these stocks could win if business conditions improve or if the
companies make cash distributions or are taken over.
Some of the stocks have slid so low that their issuers have done reverse splits to
boost their prices. Many are orphans, with little or no coverage from Wall Street
analysts and scant interest from institutions because of their low market values
and share prices below $5. Institutions often avoid such stocks because of their
penny-stock taint and perceived bankruptcy risk, although most cash-rich outfits
aren't in imminent danger of going belly up.
The main risk is that operating losses continue, burning through existing cash.
"You want to differentiate the solid franchises from the value traps," says Steve
Milunovich, tech strategist at Merrill Lynch. "A stock may look cheap, but there
could be fundamental erosion in the company's business. You want to analyze a
company's strategic position and whether you can count on that cash being there
in 12 months." Milunovich says a solid cash position "at least buys you time," but
he and other analysts argue that sales and profit growth -- not balance sheets --
generally drive tech stocks.
The accompanying table ("In the Bargain Bin"), compiled in part from a screen
generated by Merrill Lynch, shows 29 cash-rich stocks. The list shows net cash
(cash, after factoring in debt), net cash per share, as well as book value per share,
based on the most recent quarterly financial statements. Most of the book-value
calculations are conservative, being based on tangible book, which excludes
goodwill and other intangibles. The net cash figures typically include marketable
securities.
The group can be separated into two general categories: smaller firms with large
cash positions relative to their market values, and larger companies, such as Sun
Microsystems, Siebel Systems and BMC Software with ample, but not enormous,
cash hoards relative to their share prices, but which arguably have better business
prospects and greater staying power than the smaller fry.
Among the big stocks, Sun could be a bargain. The server maker trades at 2.70 a
share, down 78% this year and 95% under its 2000 peak of 65.
Sun faces competitive challenges and has seen an exodus of top talent. Yet it has a
great balance sheet, with net cash of $4.3 billion, or $1.30 a share, as of June 30.
That's about half of Sun's market value. Sun's book value is $3 a share and its
tangible book, excluding goodwill, is $2.33. Sun is trading below book value for
the first time since going public in 1986.
In addition, Sun's price-sales ratio, derived by dividing its $9 billion market value
by its projected annual revenue of $12 billion, stands at 0.75, and is only about 0.4
when adjusted for cash. Sun is expected to operate at a slight loss in the current
quarter and at break-even in its fiscal year ending in June.
"Sun isn't a bad one to think about," says Milunovich. "It's a big company with a
large installed base. It has discounted a lot of the bad news." He says Sun will
revive in the next three years and that "patient investors probably will come out
okay."
Many Street analysts are neutral on Sun, and Milunovich is hardly excited about it.
Yet it seems that much of the risk has been wrung out of Sun, barring steep and
unforeseen losses. The downside for the stock appears to be 2 to 2.50 a share,
while the upside could be substantial if tech spending improves or Nasdaq rallies.
Assuming 30 to 35 cents in annual earnings power, Sun could trade up to 7 or 8 in
the next few years.
Siebel, at 7.50, has over $3 a share in net cash, expected profits of 31 cents this
year and ample cash flow from operations. Its downside risk seems limited.
Yahoo, at 9.50, possesses nearly $2.50 a share in net cash, and boasts another
significant asset, a 34% stake in Yahoo Japan, valued at about $3 a share. The
combination of the cash and the Yahoo Japan stake so far has put a floor under
Yahoo's stock at 8. Apple Computer's cash position, along with its profitability,
has supported the stock. Apple trades at 14.50, little more than its $11 a share in
cash.
JDS Uniphase, recently at a little more than 2, has about $1.4 billion, or $1 a share
in net cash and a $1.47 book value.
Earthlink, the Internet-service provider, has $556 million of cash and minimal
debt. At 5.70, it isn't trading much above its cash per share of $3.70, giving only a
modest value to its five million subscribers. Comverse Technology, at 7.42,
appears to pose little downside risk, given its net cash position of $7.30 a share.
It's likely to post modest losses until next year. But, as a leading provider of
voicemail software for the wireless phone industry, it has ample earnings power
and strategic value.
Research in Motion's key product, the Blackberry hand-held wireless e-mail
device, has been dubbed the "Crackberry" because of its popularity with users,
including many on Wall Street. At 9.30, it trades for little more than the $7.67 a
share in cash on its balance sheet. Detractors cite competitive threats and
operating losses, but RIM has staying power, given its cash. And it's a potential
acquisition target.
Milunovich says Corvis and the larger Ciena, both makers of optical-networking
products for telecoms, could be takeover candidates, too.
Corvis, which once fetched 115 a share, trades for just 62 cents a share, less than
half its net cash position. Corvis's sales have collapsed, to just $3 million in the
latest quarter, but its fans like its balance sheet and technology.
Sycamore Networks, which once touched almost 200 a share, is languishing at
2.40, but has net cash of $4 per share. Commerce One, whose fans thought it
would clean up in business-to-business e-commerce, has fallen to 2 from over
$1,500, adjusted for a recent 1-for-10 reverse stock split. It has more than $5 a
share in cash, but is burning through it.
Merrill Lynch strategist Richard Bernstein says techs' relatively high cash levels
inhibit consolidation. "A lot of these companies should be liquidated and the cash
returned to shareholders," he adds. Alternatively, they might be sold. |
