Listen Up - Dolby A Sound Investment

9/7/2009


  Recent Price
$37
  Dividend
$0.00
  Yield

0.0%

  P/E Ratio
17
  Shares (millions)
116
  Long-Term Debt as % of Capital
0%
  52-Week Price Range
$44.00 - $24.50

Dolby Laboratories ($37; DLB) keeps inventing new ways to apply its audio technology. Soundtracks for most major films employ Dolby’s encoding system. Both DVD and Blu-ray players also use the technology, while many camcorders record in Dolby sound.

Demand for high-definition televisions and surround-sound systems has supported Dolby’s operating momentum in recent quarters. Rising interest in portable music and video could propel future growth. Dolby is a Focus List Buy.

Business breakdown

Technology licenses, accounting for 80% of sales, rose 30% over the past 12 months. Most licensing deals involve consumer electronics, primarily DVD and Blu-ray players, or audio applications for personal computers. Revenue from Dolby’s audio technology, included in Microsoft’s ($24; MSFT) new Windows 7 operating system, should kick in during the March quarter. The company is also adapting its headphone technology for mobile computers produced by Lenovo and Acer, giving Dolby 20% penetration in the surging market for inexpensive netbook laptops.

Until the markets for consumer electronics and personal computers recover, sales to broadcasters should drive most of Dolby’s growth. Virtually every digital television and set-top box in the U.S. uses Dolby’s audio format. The company sees particularly strong growth opportunities in Europe, a larger market than the U.S., and one where Dolby holds less than a 20% share. France, Italy, and Spain have adopted high-definition standards that require Dolby technology. The company targets 35% penetration of the European broadcast market.

Products and services comprise the remaining 20% of sales. Operations include decoding film soundtracks, calibrating cinema sound systems, and converting analog cinema audio systems to digital.

Looking beyond netbooks and high-definition TV, Dolby is preparing for the newest of the new. The next big market may be 3-D. Although better known for its sound, Dolby also markets 3-D technology that theaters combine with their existing digital servers. More than 10 3-D movies have been scheduled for release this year, and Dolby has outfitted 1,200 of the 5,000 worldwide screens with 3-D cinema systems.

Until now, television has only made sporadic attempts to harness 3-D technology. That might change with a handful of cable networks exploring the medium. For now, though, one of the largest barriers for drawing an audience is price; high-definition, 3-D televisions can cost up to $5,000.

Conclusion

Dolby forecasts sales growth of 9% to 12% in fiscal 2009 ending September, well off the five-year average of 24%, but impressive given the environment. Free cash flow increased 36% over the past year and 43% annually over the last three years.

In each of the past eight quarters, Dolby has topped the consensus profit estimate by at least 17%. The stock’s growth has not gone unnoticed, as the shares are up 14% this year. Despite the strong stock performance, Dolby trades at 17 times trailing earnings, 34% below its three-year average valuation. An annual report for Dolby Laboratories Inc. is available at 100 Potrero Avenue, San Francisco, CA 94103; (415) 558-0200; www.dolby.com.

 

DOLBY LABORATORIES
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Jun '09 $0.44 vs. $0.40 + 11% $40.83 -

$33.60

19 - 16
Mar '09 0.60 vs. 0.49 + 18% 34.95 - 24.77 18 - 12
Dec '08 0.68 vs. 0.43 + 20% 35.75 - 24.50 21 - 14
Sep '08 0.42 vs.

0.39

+ 26% 44.00 - 33.00 26 - 19
           
Year
(Sep.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2008 $640 $1.74 $0.00 $53.63
-
$32.94 31 - 19
2007 $482 $1.26 $0.00 39.70
-
18.64 32 - 15
2006 $392 $0.80 $0.00 24.00
-
14.75 30 - 18
2005 $328 $0.50 $0.00 25.45
-
14.50 51 - 29
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
95 88 60 99 97 74 43

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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