Dollars from DVDs

12/17/2004 12:00 am EST


Michael Ozanian

Senior Editor, Forbes Earnings Quality Report

If you watch a DVD, you're indirectly familiar with Macrovision, whose technology is used for copy protection. Here, Michael Ozanian, editor of the  Forbes Earnings Quality Report, explains why "Wall Street loves this stock" and why he rates it a "compelling buy."

"Macrovision (MVSN NASADAQ), which develops and licenses copy protection, electronic licensing, and rights management technologies for major Hollywood studios, independent video producers, software publishers, digital set-top box makers, and digital pay-per-view network operators, has been a hot stock this year. MVSN’s shares are up 13% year-to-date versus a gain of 3.4% for the NASDAQ index. Although well off its all-time high of $107 a share, MVSN’s stock is still up approximately 1,000% since its 1997 initial public offering.

"Wall Street loves this stock because MVSN’s technology is embedded in virtually all of the DVD recorders entering the market and in the 280 million DVD devices already installed throughout the world. MVSN’s copy protection and rights management technologies have also been utilized on over six billion DVDs and VHS cassettes, 200 million CD-Roms and 150 million music CDs. Harry Potter, Prisoner of Azkaban , a Warner Brothers title released on November 23, is protected with MVSN’s analog DVD copy protection technology. Such dominance has been a boon for MVSN’s growth. In the September quarter the company’s sales rose 57%, to $49 million, while earnings per share went up 29%, to 22 cents. Both sales and topped the Street’s expectations, the latter by 16%.The consensus is for MVSN to post earnings of 89 cents a share this year and $1.04 in 2005. During the next three years analysts are projecting average annual EPS growth of 19% for MVSN.

"There is a good reason that Macrovision dominates its industry: It continues to increase the amount of money it pours into research & development. The company is investing for its future. During the past four years Macrovision has almost doubled its spending on research and development, which should enable the company to maintain the top position in its industry and continue to increase its earnings rapidly. At the end of 2001, the company was spending 9% of sales on R&D. Last quarter it plowed back 17 cents of each dollar of sales into R&D. When a high-tech company like MVSN boosts R&D spending it is in effect sacrificing current earnings growth for future earnings. But that is the best way to create the new products it needs to stay ahead of its competitors.

"The company has good earnings quality because it has not been padding its current earnings by skimping on R&D. As a result, several new products should bear fruit in the coming quarters. MVSN recently launched Flexnet Manager, its software asset-management systems, as well as Hawkeye, a peer-to-peer file sharing content management service. Value Line believes that these products will key the company into some emerging growth platforms. Also, Lions Gate Entertainment, the top producer and distributor of independent films, has signed a multi-year agreement that extends their use of MVSN’s technology to copy protect its DVD releases. What’s more, Macrovision has the financial muscle to fuel its R&D. The company has no debt and during the past four quarters has generated $49 million in free cash flow. And compared to other tech outfits, we believe MVSN is cheap. Its stock goes for 26 times its 12-month forward earnings, versus a multiple of 29 for the NASDAQ 100. The company’s industry-leading position, good earnings quality and relatively modest price makes the stock a compelling buy in our view."

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