Value Search: Dirt Cheap Tech Stocks (STX, WDC, KLIC, HPQ, DELL, SNDK, MU, CSC, MSFT, INTC)

Looking for companies that are “cheap” is often a tricky situation when you just run the numbers.  Cheap stocks are usually cheap for a reason, and that reason is either because fears have allowed shares to be sold off massively or because the growth of yesterday is not at all the growth of tomorrow… or worse.  Still, when you get companies that trade under 10-times believable forward earnings expectations and which have low multiples of sales and even a low implied book value, this is where value investors tend to focus.  Whether a turnaround comes or not might not even matter if stocks get “cheap enough” for the value investors.

We reviewed hundreds of companies in screens and wanted to come up with a list of “Cheap Technology Stocks” that value investors can look at for the long-term.  First off, finding cheap technology stocks is not easy.  In storage, both Seagate Technology plc (NASDAQ: STX) and Western Digital Corporation (NYSE: WDC) made the grade.  Some others were Kulicke & Soffa Industries Inc. (NASDAQ: KLIC), Hewlett-Packard Company (NYSE: HPQ), Dell Inc. (NASDAQ: DELL), SanDisk Corp. (NASDAQ: SNDK), Micron Technology Inc. (NYSE: MU), and Computer Sciences Corporation (NYSE: CSC)

Giant runner-ups that did not quite make it were Microsoft Corporation (NASDAQ: MSFT) and Intel Corporation (NASDAQ: INTC), although if there shares fell a few percent and if the business does not look as choppy then they would be on the list.

STORAGE, ENDLESS STORAGE

The disk drive and external storage market is a crowded market, and the cost of a terabyte of external storage keeps getting cheaper and cheaper.  1 terabyte of external storage can now be had for under $100.00, something which might have seemed unfathomable even a few years ago.  The good news is that as government and corporate storage needs are nearly endless through time, Joe Public also has an infinite and insatiable demand for more and more storage space as the world moves to nearly-disposable computing devices and as media storage never stops growing.  This leaves both Seagate Technology plc (NASDAQ: STX) and Western Digital Corporation (NYSE: WDC).  Both Western Digital and Seagate trade at ridiculously low P/E ratios and the competition from Hitachi, Toshiba, Iomega, and even from external storage on the cloud are why these valuations remain so low here.

At $28.10, Western Digital trades at about 7.85-times June-2011 estimates and trades at almost 6.8-times expected June-2012 estimates.  Its 52-week trading range is $23.06 to $47.44 and its market cap is just over $6.5 billion.  The most recent July balance sheet showed over $2.7 billion in cash, its shareholder equity was listed as $4.7 billion, and its tangible net assets were $4.475 billion.  The company also carries very little debt.  Thomson Reuters has a consensus price target as $34.48 for Western Digital, representing implied upside of about 20%. Western has also had much to thank from Apple, as it is usually the most featured external storage drive product in the Apple stores.

At $11.93, Seagate trades at 5.8-times June-2011 estimates and trades at 5.1-times expected June-2012 estimates.  Its 52-week trading range is $9.84 to $21.58 and its market cap is just over $5.6 billion.  The most recent July balance sheet showed over $2.37 billion in cash, its shareholder equity was listed as $2.7 billion, and its tangible net assets were $2.68 billion.  Unlike Western Digital, Seagate carries more than $2.5 billion in long-term debt and ‘other’ liabilities.  Seagate also talked to its former private equity parent about going private again according to reports, although that yielded nothing.  Thomson Reuters has a consensus price target as $16.93 for the stock, representing implied upside of about 42%.

Analysts have a higher upside to the Seagate price target objective, but of the two it is Western Digital which has the cleaner balance sheet. Neither are likely to go private but shareholders are paying very low multiples as storage makers try to find equilibrium in pricing their devices while trying to maintain margins.

SEMICONDUCTOR CAP-EX

Kulicke & Soffa Industries Inc. (NASDAQ: KLIC) has become a value investor’s flag in the cap-ex sector of semiconductors.  The company has recently named a new CEO (from Lattice) and it has also announced that it is moving its headquarters to Singapore.  With the exception of the crash in 2008 and 2009, this has spent most of the last 5-years in a trading band of $5 to $10 and the 52-week range is $4.03 to $9.58.  At $6.29. the stock has very low multiples and only a $445.8 million market cap.  It trades at a discount to revenues and consensus earnings estimates in FY SEPT-2010 and FY SEPT-2011 are $1.95 EPS and $1.75 EPS (respectively).  Oppenheimer recently downgraded this one in September to Underperform from Perform in a sector call, and the analyst there lowered FY Sept-2010 estimates to $2.04 EPS from $2.05 and cut FY SEPT-2011 to $1.33 EPS from $1.70.  These figures are well under consensus from the $1.75 EPS for FY SEPT-2011 estimates, but even at the lower rate Kulicke & Soffa trades at less than 5-times forward earnings. Thomson Reuters has a consensus price target as $8.84 for the stock, representing implied upside of about 40%.

PCs OR TOASTERS?

Hewlett-Packard Company (NYSE: HPQ) and Dell Inc. (NASDAQ: DELL) find themselves in a value race, and we are the first to admit that “Value” here could represent nothing more than a value trap.  Nonetheless, dirt cheap multiples are dirt cheap multiples when it comes to screening stocks.  The problems of each are known by all: dumping a solid CEO, new management with a questionable choice, perhaps a board of directors off its rocker at HP, and new competition from Cisco; old management using the same strategy and a business model change that is taking too long while Cisco encroaches on its enterprise sales at Dell.  If you take the consulting and IT business operations out, the biggest problems that these businesses are suffering from the fact that computers are getting smaller and smaller, cheaper and cheaper, and the notion of “good enough performance” has turned the high growth PC business of the past into the toaster and home appliance business of the future.  Lastly, Apple has become perhaps the single largest distraction to the traditional businesses of each.

Dell Inc. (NASDAQ: DELL) trades at a mere $13.25 with a market cap of $25.7 billion and its 52-week trading range is $11.34 to $17.52.  Thomson Reuters has estimates of $1.29 EPS for FY JAN-2011 and $1.44 EPS for FY JAN-2012 and revenue expectations are almost $62.4 billion for 2011 and $65.88 billion for 2012.  If you smooth these out and blend the two years, Dell trades at about 9.75-times expected earnings and trades at about 0.4-times expected revenues.  Analysts have an average price target of $15.46, implying 17% upside in the stock to today’s price.

Hewlett-Packard Company (NYSE: HPQ) trades at $40.68 with a market cap of $92+ billion and its 52-week trading range is $37.32 to $54.75.  Thomson Reuters has estimates of $4.51 EPS for FY OCT-2010 and $5.12 EPS for FY OCT-2011 and revenue expectations are almost $125.5 billion for this year and $132.3 billion for next year.  If you use next year’s estimates, HP trades at just under 8-times expected earnings and trades at about 0.7-times expected revenues.  Analysts have an average price target of $53.15, implying 31% upside in the stock to today’s price.

There is a coin toss here currently.  HP is in a state of change and is digesting 3Com, Palm, and 3PAR acquisitions.  It also has deeper pockets and can outspend Dell on each and every turn if it chooses to in the war of competing in IT against Cisco and IBM.  The multiples are cheap on both shares, and HP has a higher implied upside.  The difference is that Dell is actually easier for analysts to track right now because of a more stable management and an easier to interpret business model.  Cisco is a risk to both, and both probably hate Forrest Gump’s favorite fruit company (Apple) now.

FLASHER ALERT!

Flash memory has been the craze of all chip sectors based upon the endless waves of consumer electronics containing more and more flash memory.  The independent leader and pure-play flash memory company is SanDisk Corp. (NASDAQ: SNDK).  The company has been far from immune to the market and far from immune to the slowdown of tech growth.  It is also losing its founding-CEO to retirement.  At $37.05 its market cap is now $8.6 billion and its 52-week trading range is $19.18 to $50.55.  SanDisk does carry over $1.2 billion between long-term debt and ‘other’ longer-term liabilities but it has nearly $2 billion in cash and equivalents and it lists another $2.8 billion in its long-term investments.

Despite all of the concerns of a slowdown and despite the rumors that it may make an acquisition of a solid-state drive maker and despite that shares have slid almost 30% from highs, SanDisk finds itself in a conundrum: it could be a value stock, but it could also be a value trap because the boom-bust cycles of the past have generated losses of more than 50% from peak to trough rather than just over 30%.  Thomson Reuters has estimates of $4.20 EPS and $4.87 billion for 2010 revenues and $3.96 EPS and $5.40 billion in revenues for 2011.  Lower earnings on higher revenues equals margin compression and continued pricing pressure.  If we blend the two years, SanDisk trades at only about 9-times forward earnings and just under 1.7-times revenues.  Analysts still have an average consensus price target of about $48.00, implying almost 30% upside to current prices.

DRUMMING DRAM FOR A SURPRISE

Micron Technology Inc. (NYSE: MU) feels like a perpetual turnaround stock, so the notion that it is a value stock with low multiples is almost hard to fathom.  Still, we want to stay true to form here now that Micron has been trying and trying to get its house in order.  This is also the last DRAM giant that is still housed here in the U.S.  Unfortunately, earnings are due Thursday after the closing bell and that means you better take a wait and see attitude in case Micron confesses and lowers some of its expectations like so many others have.

Micron trades at $6.95 with a market cap of $6.9 billion and its 52-week trading range is $6.12 to $11.40.  The August quarter-end due today will mark its year-end report.  Thomson Reuters has estimates of $1.95 EPS and $8.65 billion in revenues for Aug-2010 and 2011 estimates are $1.57 EPS on $10.71 billion in revenues.  See that, higher revenue and lower earnings… ongoing margin compression.  If we discount the Thomson Reuters estimate by one third for next year on earnings and 10% on revenues (implied $1.04 EPS and almost $9.8 billion revenues) we still have a company at less than 7-times forward earnings and a forward revenue multiple of only 0.7.  Why do we discount the numbers so much?  Simple, DRAM has a poor history and turnarounds sometimes do not stay turned around.  While it has almost $2.3 billion in long-term debt and ‘other’ debt, the cash is over $2.3 billion and long-term investments are another $1 billion.  Because of the value listed of its factories, its tangible book value was most recently listed as $7.3 billion and that means that the implied price should be higher than today’s value by nearly 10% just to get to even on its book value.

BAD BOYS: TECH & IT CONSULTING

Computer Sciences Corporation (NYSE: CSC) in the outsourcing of IT and consulting businesses for all aspects of technology.  It was hard to include the company in a ‘tech’ screen, but frankly it was harder to exclude it from the screen.  CSC has not just been dead money for five years.  This has been the case even longer.  Outside of the crash, the longer term trade here has been to buy when it is close to $40.00 and to sell when it is close to $60.00.  The big caveat here is that CSC has nearly 100,000 employees and the company is very dependent upon trends tied to its human resources and IT-consulting jobs tend to pay more than traditional factory and support jobs.

With shares at $46.03, its market cap is $7.1 billion and its 52-week trading range is $39.61 to $58.36.  The current P/E is under 10 today and when we ran the numbers from Thomson Reuters the forward P/E ratios remained well under 10 as well.  FY MAR-2011 is $5.30 EPS and FY MAR-2012 is $5.63 EPS, so a blend of the two for a forward year target would be $5.46 and that gives forward earnings of 8.4-times earnings.  Analysts are mixed on CSC and the consensus price target is $51.21, implying about 11.3% upside from current prices.

CONCLUSION & EXCLUSIONS

Sadly, both Microsoft Corporation (NASDAQ: MSFT) and Intel Corporation (NASDAQ: INTC) were both within striking distance of our criteria.  Close works for hand grenades and horseshoes but not stock screens.  If you went back in time and told investors that investors would only pay a little more than 10-times forward earnings for cash-rich tech giants like Microsoft or Intel you might have thought things went even crazier than they really did.

The other sector we left off, which did fit within criteria in some cases, was the EMS or electronics manufacturing services companies due to the nature of big beats or bad misses as a sector and because they are dependent generally on many other industries besides just technology.

As a reminder, finding value is not a trend investors hope for immediate returns by tomorrow or next week.  It is about taking a stand for a much longer period where a value oriented investor may feel that most of the downside is already reflected in the shares.  As many stocks that hit new 52-week lows tends to keep hitting 52-week lows, many “cheap stocks” often get cheaper.  The term “Value trap” also highlights some of the perils out there.

You can join our free daily email distribution list to hear more about dividend trends, analyst upgrades and downgrades, top day trader and active trader alerts, news on Buffett and other investment gurus, IPOs, secondary offerings, private equity, and more.

JON C. OGG