"I use the term 'blowout' very sparingly," says tech expert Paul McWilliams in his Next Inning newsletter, which focuses solely on technology investing. "But even 'blowout' falls short of describing the quarter turned in by Sigma Designs (NASDAQ: SIGM)."
Indeed, the advisor notes, "I've likely described something as a 'blowout' less than ten times in the past five years. These 'waterfall' quarters don't happen often. As for Sigma, I didn't see this one coming and it's time to fix it.
"As background, SIGM makes media processor SoC (System on Chip) solutions for STB, BluRay and HD DVD, TV and various consumer devices that benefit from hooking into an IP video network.
"IPTV is an IP video network and, as a result of IPTV, we are putting these sorts of video networks in our homes. Roughly 77% of SIGM's sales last quarter were into IPTV STB applications.
"To give you an idea the magnitude of this recent surprise, SIGM's revenue for Q3 of this year (the October quarter) is closer to the forecasts most analysts had for Q4 next year than it was to what they were forecasting for the quarter just closed.
"Basing assumptions on what we were told in the press release and the conference call (assumes 10% tax), even if SIGM 'only' performs to the top side of its guidance for the January quarter, it should report EPS of something in the mid-$0.80's bringing in an annual total of something in the mid-$2.40's.
"That's considerably better than even the most optimistic expectations I've seen (the highest of the covering analysts was $2.16 going into the call).
"In looking at next year on the back of an envelope, it looks very realistic that if we assume 35% tax, which was more or less the guidance, 6% growth in operating expenses, 50% gross margin, just under 5% return on cash (no acquisitions, of course) and fairly modest growth in fully diluted shares, I think it's pretty reasonable to make a case for earnings somewhere around $3.20 +/- 10%.
"On an optimistic day, just that picture could draw a $75-$80 bid versus something $60'ish the pre-call $2.08 consensus might have drawn.
"The better news is that it sounds as though there will probably be a fairly solid year of growth and optimism during which we can learn how strong the differentiation will now be in a broader market including STB, Blu-ray/HD DVD, TV and various media adapter markets. Overall, I think the fair value range, based on what we know today, is between $75 and $80."
Each day, Steven Halpern's TheStockAdvisors.com website features the latest investment commentary and favorite stock picks of the nation's leading financial newsletter advisors.
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