Why These Tech Companies Are Good Value Investments

Rupert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Technology companies are usually associated with high valuations. Therefore it is a real surprise when tech companies start trading on valuations that could allow them to be considered as a prospective value investment.

Currently, there are three companies in the tech sector that look appealing to me as value investments, but could it actually be worth investing?

Firstly, there is Silicon Motion Technology Corp. (NASDAQ: SIMO), a fabless (it does not own a chip fabrication plant) semiconductor company that designs, develops and markets, high-performance, low-power semiconductor solutions for the multimedia consumer electronics market. In particular, the company manufactures the LTE communications chip used in the Samsung Galaxy smart phone, Apple's major competitor.

Secondly, Corning Incorporated (NYSE: GLW) a technology company best known for its production of Gorilla Glass, which is used in smartphones. The company also manufactures glass for other electronic items such as LCD TV screens.

Thirdly, AVX Corporation (NYSE: AVX) a manufacturer and supplier of passive electronic components such as capacitors and connectors for wires and electronic switches.

How do they stack up?

So how do these three company's compare as a value investment. Well to start they all have a low valuation in relation to the rest of their peers in the sector.

<table> <thead> <tr><th> <p>Company</p> </th><th> <p>P/E</p> </th><th> <p>Average P/E of ten largest peers</p> </th></tr> </thead> <tbody> <tr> <td> <p>Silicon Motion</p> </td> <td> <p>7.4</p> </td> <td> <p>53.4</p> </td> </tr> <tr> <td> <p>Corning</p> </td> <td> <p>13</p> </td> <td> <p>53.4</p> </td> </tr> <tr> <td> <p>AVX Corp</p> </td> <td> <p>15</p> </td> <td> <p>53.4</p> </td> </tr> </tbody> </table>

AVX figures based on underlying earnings.

Compared to the average P/E multiple of their ten largest peers in the diversified electronics sector, all three companies appear cheap. Silicon Motion has the lowest valuation and when coupled with the company's predicted earnings growth rate for next year, the company has a PEG ratio of 0.4, giving the stock a GARP or, growth-at-a-reasonable-price classification --- halfway towards a value investment.

Finances are robust

Furthermore, each company is well capitalized removing any worries about financial strength and potential insolvency.

<table> <thead> <tr><th> <p>Company</p> </th><th> <p>Debt to Equity</p> </th><th> <p>Quick Ratio</p> </th></tr> </thead> <tbody> <tr> <td> <p>Silicon Motion</p> </td> <td> <p>0</p> </td> <td> <p>4.2</p> </td> </tr> <tr> <td> <p>Corning</p> </td> <td> <p>0.14</p> </td> <td> <p>3.93</p> </td> </tr> <tr> <td> <p>AVX Corp</p> </td> <td> <p>0</p> </td> <td> <p>4.51</p> </td> </tr> </tbody> </table>

Of the three, Corning is the only company with any debt. All three have quick ratios of around four indicating that they can cover their liabilities falling due within twelve months four times with assets - excluding inventories.

And as each company is highly cash generative, they have plenty of cash on the balance sheet, which pushes low valuations lower and removes even more financial risk.

<table> <thead> <tr><th> <p>Company</p> </th><th> <p>Profit Margin</p> </th><th> <p>Cash per Share</p> </th><th> <p>Book per Share</p> </th><th> <p>P/E After the Deduction of Cash</p> </th></tr> </thead> <tbody> <tr> <td> <p>Silicon Motion</p> </td> <td> <p>18.5%</p> </td> <td> <p>$6.21</p> </td> <td> <p>$11.69</p> </td> <td> <p>3.4</p> </td> </tr> <tr> <td> <p>Corning</p> </td> <td> <p>22.3%</p> </td> <td> <p>$4.35</p> </td> <td> <p>$7.94</p> </td> <td> <p>9.3</p> </td> </tr> <tr> <td> <p>AVX Corp.</p> </td> <td> <p>7%</p> </td> <td> <p>$3.92</p> </td> <td> <p>$14.49</p> </td> <td> <p>10.1</p> </td> </tr> </tbody> </table>

As this was written Silicon Motion's share price was $11.35, indicating that 55% of the company's share price is cash, which removes a significant amount of downside risk for investors. Additionally, the company supports a dividend payout of $0.60 per share, a yield of 5.3%, greater than that of AT&T and covered three times by earnings-per-share.

After stripping out cash, Coring also appears cheap and taking into account next years predicted Earnings Per Share (EPS_ the company is trading at a forward earnings multiple of 8.2 and a PEG ratio of 0.8 another possible Growth At a Reasonable Price (GARP) investment.

AVX has not been able to grow its earnings like its peers and this is one of the reasons the company has such a low valuation. Its EPS have grown just 2.6% during the past five years and sales have fallen a similar amount. However, the company now offers a 3% dividend yield and the payout is covered twice by earnings. Additionally, the company is trading $2 per share below book value and after stripping out cash, is trading at a forward earnings multiple of 10.1, a yield of 3% giving investors an above average yield.


All three of these companies exhibit potential to be a value investment. Each one has a solid cash balance, low valuation and two offer GARP.

Moreover, thanks to their low valuations, both AVX and Silicon Motion offer dividend yields above the market average. 

So, based on that I believe all three companies could be potential value investments but if I had to pick one it would be Silicon Motion for its unbelievably low valuation, and 5% yield.

Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool recommends Corning. The Motley Fool owns shares of Corning. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus