"Stars are Aligned" for Netgear
07/01/2005 12:00 am EST
"We look for the rare combination of first-class fundamentals and sound technicals," says Charles Norton, editor of the recently-launched service, Supernova Stocks . Here he looks at Netgear, which he calls "one of those rare opportunities where the stars are aligned."
"Walk into almost any coffee bar nowadays, and you're likely to see patrons feverishly working away on their laptops, thanks in part to the so-called Wi-Fi high speed Internet connection. It's not just coffee bars either- airports and hotels frequently provide wireless Internet access, allowing the business traveler to get online from almost anywhere. There's a good chance that the wireless card inside many of those laptops comes from Netgear. And wireless cards are only one small item for a company with a suite of over 100 products.
"In order to remain one step ahead in a highly competitive business, Netgear is constantly rolling out innovative new products, at the astounding rate of roughly 12 per quarter. For example, last year the company began distributing routers that can also be used to make Internet-based telephone calls, or VoIP, giving the company access to a fastgrowing industry still in its infancy. Another new product is Netgear's Wireless Digital Media Player, which can be used to wirelessly route video, music, and pictures from a computer to a TV. The lines are certainly blurring between the computer, TV, and stereo as these gadgets converge, and Netgear is right in the middle of it.
"Successfully managing the development of over 100 products and the availability of these products in tens of thousands of sales outlets around the world seems like a daunting challenge. But Netgear's industry-unique inventory management system, which is directly connected to all of its US retailers and distribution partners, makes it possible, providing enormous operational efficiencies. Soon, Netgear will complete the system by linking all of its European and Asian retailers as well. Its track record of increasing sales and earnings is impressive. Margins have been consistently expanding and currently sit at three-year highs. Netgear also has a pristine balance sheet to match. With a large and growing pile of cash and no debt, management certainly has the flexibility to make strategic acquisitions of key technologies to expand the company's product line.
"Institutional sponsorship has been steadily growing, quarter after quarter, since the company became public in July 2003. Currently 73 funds own the stock, while only 34 funds were holders last year, according to data from William O'Neil + Co. The business driver here seems undeniable and the fundamentals are first-rate, yet the valuation is still reasonable- what a great combination. In our opinion, Netgear is one of those rare opportunities where the stars are aligned. We first dubbed Netgear as one of our '5 Supernova Stocks for 2005' in March. At the time, however, the stock was working on a base, so we were not yet prepared to buy. But today it's nearing new high ground and so we're adding the stock to our model portfolio."