One Rockin' Trio of Techs

02/16/2011 11:33 am EST

Focus: STOCKS

Oracle, Applied Materials and Corning shares are still bargains, writes Paul McWilliams of Next Inning Technology Research.

Oracle is thinking big.

There has been talk of MIPS Technologies (Nasdaq: MIPS) as an acquisition target, and of Oracle (Nasdaq: ORCL) hunting for semiconductor companies. I continue to think Mellanox Technologies (Nasdaq: MLNX) would be a better target for Oracle than MIPS. If Oracle were going to enter the processor intellectual-property licensing business, I agree that MIPS would be a much more logical choice. However, I think Oracle wants to own semiconductor intellectual property, not sell it.

Setting aside the semiconductor talk, Oracle CEO Larry Ellison's statement that he wants duplicate the Apple (Nasdaq: AAPL) model in his sector describes precisely what I wrote a year or so ago would be Oracle’s goal. Oracle is going after the ecosystem enterprise model, and I think it is Hewlett-Packard's (NYSE: HPQ) biggest threat. H-P certainly has resources Oracle doesn't, but it doesn't have the heavy lifting software base it needs to win. That's why I think it has to buy SAP (NYSE: SAP). Oracle, of course, needs to develop a client-side computing strategy that includes mobile. My thinking is there is a thin client effort working under the covers, but I think acquiring Research in Motion (Nasdaq: RIMM) would be an interesting play.

The bottom line here is I'm confident Ellison is thinking big and his real target is Apple’s market cap. I continue to view Oracle as a good strategic investment.

AMAT: A Fab Opportunity

The fab equipment industry is highly cyclical. Therefore, it's not unusual for valuation multiples (price-to-earnings ratios) to be low even when near term growth is high. Sector leader Applied Materials (Nasdaq: AMAT), it trades today at less than ten times its forward earnings estimate plus my view of its balance sheet value

I'm not sure why Wall Street seemed so intent in selling off the stock last summer. There were few things more obvious than the fact that spending on chip-making equipment would be strong through at least 2011, and quite possibly into 2012. As it has worked out, Wall Street finally caught on last fall and the price of AMAT has been on a steep climb since. It is now approaching the low end of the fair value range I shared last August when AMAT was trading for just over $11.

In the case of Applied Materials, I think it's important to dig a bit more deeply into the balance sheet than we do with most companies. AMAT carries a fairly large deferred-revenue liability of $0.63 per fully diluted share and long-term investments worth $0.98. If we add this to the net current asset value, the combined total comes to $4.12 per fully diluted share.

The fiscal 2011 earnings consensus is $1.25, which is up only about a nickel from where it was last August. If we multiply that times a valuation multiple ranging from 10 to 12 and add the adjusted net current asset value, the estimated fair value range calculates to be $16.62 to $19.12. [Shares closed at $16.13 Tuesday—Editor.]

Corning’s Monkey Business

Corning (NYSE: GLW) investors were probably pretty excited in 1962 when the company first announced it had developed a nearly unbreakable glass. However, it didn't take long for the excitement to subside; Corning couldn't find any volume applications for it then. While not forgotten, Gorilla Glass was placed on the back shelf for nearly a half a century. However, with the growth of touch sensitive LCDs (liquid-crystal displays), Gorilla Glass has found its niche and is now back on the front burner. While Gorilla Glass is set to contribute an increasing amount of revenue for Corning, it will remain a fairly small piece of the much larger pie for some time yet.

Even if we don't make any adjustments, Corning's balance sheet sports $1.55 in net current assets per fully diluted share. As was the case throughout 2010, I think the 2011 earnings consensus of $2.02 will prove to be too low. But even if we use that with a fairly conservative forward valuation multiple range running from 12 to 14, plus net current asset value, the calculated estimated fair value range for the stock is $25.79 to $29.83. Based on this estimate and Corning's current price of $21.85, I would be more inclined to accumulate shares here than thin an existing position.

[Shares of the chip maker McWilliams recommended four weeks ago are up 6% since. Jim Jubak expects the ongoing chips boom to boost Applied Materials shares for another year—Editor.]

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