Dolby Labs Is On Everyone's Ear

3/8/2010


  Recent Price
$56
  Dividend
$0.00
  Yield

0.0%

  P/E Ratio
28
  Shares (millions)
116
  Long-Term Debt as % of Capital
0%
  52-Week Price Range
$55.80 - $27.50

We hear Dolby Laboratories ($56; DLB) on our smartphones, video-game systems, car speakers, camcorders, and audio receivers. We experience Dolby in DVD and Blu-ray players. And we see Dolby in three-dimensional movies at theaters.

The stock has surged 102% in the past year, and it is not cheap at 27 times the $2.10 in per-share earnings expected for fiscal 2010 ending September. But the growth picture is bright and the balance sheet is strong, while earnings estimates keep moving higher. Dolby is a Focus List Buy.

Sound investment

Revenue from licensing (80% of sales) has risen 7% in the last four quarters. Product sales (16%) surged 79% during that period, though services (4%) declined 9%. Operating margins have come under pressure in recent quarters, hurt by the shift in Dolby’s sales mix.

In fiscal 2009 ended September, Dolby’s sales growth was 12%, its slowest pace since 2003. Pricing leverage and market-share gains should spur at least 10% higher sales this year.

One of Dolby’s major end markets, consumer electronics, is starting to break out of the doldrums it felt for much of 2009. Consumer electronics represented just 25% of the company’s licensing revenue in fiscal 2009, down from 40% just two years earlier. Dolby says new products, principally Blu-ray players, should help offset declines in sales of DVD players. Eventually, Blu-ray drives could also become a staple for personal computers.

Dolby sees shipments of personal computers (about 35% of licensing revenue in fiscal 2009) rising 9% in 2010, up from its earlier forecast of 3% growth. Sales from PC licensing have outpaced PC growth, a trend likely to continue.

Dolby reported strong licensing growth following the release of Microsoft’s ($28; MSFT) Windows 7, a spurt fueled by consumers. Technology spending by businesses is expected to rebound later this year.

Moreover, Europe continues to make a strong push toward digital TV. The European Broadcast Union recommends Dolby as the audio format for high-definition broadcast, and the company looks to gain a 35% share of the continent’s broadcast market. Dolby generates 65% of sales outside of the U.S.

The outstanding growth in Dolby’s product segment is driven by movie theaters upgrading to digital servers and 3-D systems. Whether 3-D’s popularity has staying power is unclear, but it has won support in Hollywood because of higher ticket prices. And it appears as though filmmakers are embracing the technology more rapidly than theaters. Three upcoming movies shot in 3-D will be released within four weeks of each other, and few theaters have enough screens rigged with 3-D equipment to show them all at once.

Conclusion

Wall Street expects per-share profits to remain roughly flat in fiscal 2010. Dolby has a history of beating the consensus, posting surprises of 15% or more in each of the last four quarters.

The stock trades at nearly 28 times trailing earnings, above the average of 24 for S&P 1500 technology stocks but 8% below the stock’s five-year average. An annual report for Dolby Laboratories Inc. is available at 100 Potrero Ave., 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

Dec '09 $0.60 vs. $0.61 + 23% $47.98 -

$37.25

24 - 18
Sep '09 0.38 vs. 0.42 + 0% 42.50 - 34.14 21 - 16
Jun '09 0.44 vs. 0.40 + 11% 40.83 - 33.60 20 - 17
Mar '09 0.60 vs.

0.49

+ 18% 34.95 - 24.77 18 - 13
           
Year
(Sep.)

Sales
 (Mil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2009 $720 $2.11 $0.00 $42.50
-
$24.50 20 - 12
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
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
90 72 38 98 98 84 85

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


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