this is supposed to be the biggest game launch of the season, more royalties to Dolby.
Dolby is in Music, Movies, Video Games, what else? They are the Windows OS of the personal entertainment industry. People need dolby to experience real life media. I imagine someday this can crank $600mm in profits a year.
The context is important here...
1) The analyst consensus was already higher than the high-end of the management guidance.
2) They just beat the first quarter by $.14.
Previous Analyst Consensus:
$.62 + $.77 + $.65 + $.67 = $2.71
Previous Management Guidance:
"Dolby's predicted fiscal 2011 earnings of $2.52 to $2.66 per share"
1Q comes in at $.76 v $.62
If they simply met all of the consensus estimates (which by Dolby's past performance of consistent EPS beats by large margins would be terrible for them)
$.76 + $.77 + $.65 + $.67 = $2.85
versus current revised guidance: "These targets lead to an updated fiscal 2011 diluted earnings per share target range of $2.57 to $2.73 on a GAAP basis"
means that current analyst consensus is even further away from management EPS guidance than it was before last quarter even though they raised the guidance by $.05-$.07 (because of the $.14 beat). That means analysts will have to lower estimates which they are already doing. As you pointed out in another post, the GS analyst (who was already negative on the stock and just became more negative) had to lower her EPS estimates just to match management's raised EPS guidance.
I'm not negative on the stock, I'm just seeing a hard time spinning the EPS guidance raise for the full year by $.05 after the first quarter beat of $.14 as something positive in the face of two quarters of consecutive revenue guidance declines especially when the analyst EPS consensus (which is the real measure a company is graded on) was already higher than management EPS guidance to begin with.
But I appreciate the discussion. It sort of forced me to hash all this out.
Another good call (September):
On the other hand, Pacific Crest analyst Andy Hargreaves yesterday trimmed his EPS estimates for the company, reducing his FY 2011 forecast to $2.63, from $2.75, to reflect weakness in TV sales and continued cannibalization of notebooks by the iPad. He worries that guidance for 2011 could be below Street expectations, and contends the stock has downside to $49.
I agree with you.
Another thing about the future: we don't know what kind of machines will be here tomorrow, but if they need sound Dolby can continue to adapt their technology to them as has done in the past. So any transition from a physical media to another is not so important for Dolby.
Maybe in the short term, but not more than that if they can continue to adapt and kept their leading position. That's the real point.
They don't sell "PC" or "tablets", they sell algorithms and software.
About the P/E. Considering they have about 7$ of shares in cash a target of 48 (taking the LOWER range of company's estimated EPS) gives: (48-7)/2.57 = 16
This implies a lot of pessimism though.
Ingrid Chung at Goldman Sachs called it right including when she lowered her estimates this year to $2.78 to $3.13 two quarters ago (now mgmt guides $2.57 to $2.73) but I don't really agree with her analysis at all and so would continue to be skeptical at the downgrades in targets and the sell ratings.
The main thrust of her argument is that online video and tablets will displace blu-ray players/dvd players and computers.
You can read about her analysis here:
The problem I have with this is that it is the typical analyst black and white, all or nothing replacement thesis which is always wrong. I use Hulu and Netflix but that doesn't mean I'm going to not buy a blu ray player. I have a tablet but that doesn't mean I'm deluded to think that somehow replaced my Windows 7 laptop. To be clear, however, I realize that competing devices and services do chip away at a prospective consumer's disposable budget and, as such, yes growth of computers and physical media players may slow slightly and we are seeing this now. But I hardly think "the company’s Q4 report will be a peak for the company’s financials." which sort of sounds like a doomsday prediction...I'm not sure what she meant by that...
I'll agree that $48 is kind of hard to see, although it's very possible should they miss. But if you use $2.73 which is the high end of mgmt guidance which has typically been conservative (which is how they beat every quarter and they normally beat high end of their guidance) $48/$2.73 gives you a p/e of 17.5 which would be much lower than historical low p/e's except in 2008-2009 which were not normal years.