On this morning’s perusal of stocks that made 52 week lows yesterday, I noticed Zoran Corp (NASDAQ:ZRAN), a maker of products that power digital entertainment devices (DVD players, set-top boxes, etc) and digital imaging equipment (cameras, scanners). Since I wasn’t familiar with the company, I decided to investigate.
A cursory review of recent news articles reveals that the company’s stock took a beating yesterday (dropping 18%) after the release of the company’s Q3 results. The results themselves did not appear to warrant such a drastic drop in the price – some minor sequential revenue growth (both a sizable drop year-on-year) and a similar story for earnings. Instead, the market got spooked by the company’s Q4 forecast of adjusted losses between $0.39 – $0.43 per share, far lower than analysts’ expected forecast loss of $0.06 per share. This is the result of forecast revenues declining to $60-65 million from 4Q09 revenues of $93 million.
As a value investor, I worry less about next quarter’s results and more about the long term value of the company so I decided to investigate further. On the surface, the most attractive thing about Zoran is its balance sheet. Its earnings history is a mixed bag without consistency (It had positive earnings in just 3 of the last 10 years) upon which to base a calculation of intrinsic value from earnings power. On the other hand, the balance sheet is quite attractive, with $371 million cash vs. $109 million total liabilities. In fact, the company has NCAV (NCAV is current assets less total liabilities. Essentially, getting property and equipment thrown in for free) of $353 million vs. a market capitalization of just $307 million. Looks like an easy 15% gain as the market comes to its senses, right? Not so fast.
Looking through the company’s press releases, we see that Zoran has agreed to purchase Microtune Inc for $166 million, Cash. Net of cash acquired, Zoran’s attractive cash balance will decline by $84 million, or 23%. Combined with Zoran’s forecast of cash declining in Q4 of $15m from operations, we see NCAV decline to $254 million, not quite as attractive! Additionally, when you look at Microtune, you see that it shares with Zoran a earnings history that was positive in just 3 of the last 10 years.
Zoran lacks the margin of safety that I am looking for. What are your thoughts?
Author Disclosure: At the time of publication, the author DOES NOT have a position in securities of this company.
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