Initiate Buy: We like the stock as a relative value opportunity - Goldman Sachs - September 27, 2007
Source of opportunity
We are initiating coverage on Zoran Corporation with a Buy rating. Although Zoran’s core markets in digital cameras, DVDs, and printers have matured, we believe that it can gain share as it has a proven track record of driving cost reductions to compete in highly commoditized markets. In addition, we think Zoran can leverage new product cycles in digital TVs and handsets to sustain its growth trajectory. We also see opportunities for the company to enhance profitability through cost reductions, and we like the company’s significant cash position as a means of accelerating growth via technology acquisitions. mispriced? What do you forecast or anticipate that the market has noyet recognized? What is the return potential in the shares? Specify your price target. Is your view differentiated from consensus and if so, how?]
Catalyst
We would look for several catalysts for the stock over the next six months, including (1) insight into the magnitude of design wins in wireless handsets and digital TVs, (2) new product announcements in the high-definition DVD area, and (3) clarity on incremental share gains in the DVD and digital camera markets. As a fabless provider of semiconductor solutions for digital cameras, DVDs, advanced TVs, printers, and handsets, Zoran’s growth is tied to product cycles in consumer electronics. We expect that Zoran will continue to grow its core business at modest levels via share gains, and that it can augment its growth with new design wins in wireless handsets and digital TVs (and likely in the future with high-definition DVDs).
Valuation
Our 12-month price target is $23, which is based on a 22X multiple of our 2008 EPS estimate of $1.05 (including ESOs).
Key risks
The primary risks to our view are higher-than-expected price erosion for digital camera and DVD chips, excess inventory in the supply chain, and a lack of traction with digital TV or handset products. |
