Foolish Forecast: Dolby Cranks Up the Volume

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You don't have to be an audiophile to appreciate Dolby Laboratories (NYSE: DLB). The audio compression and noise reduction specialist is set to release its third-quarter earnings report Thursday night, and what we see could delight investors from all drawers of the phile-cabinet.

What Fools say:
Here's how Dolby's Motley Fool CAPS rating stacks up against some peers and competitors:

	Market Cap (billions)	Trailing P/E Ratio	CAPS Rating
Koninklijke Philips Electronics NV (NYSE: PHG)	$32.57	8.4	*****
Dolby	$4.58	25.7	*****
RealNetworks (Nasdaq: RNWK)	$0.99	102.6	**
DTS (Nasdaq: DTSI)	$0.51	47.8	*
SRS Labs (Nasdaq: SRSL)	$0.08	16.7	*****

Data from Motley Fool CAPS, 07/30/2008.

CAPS players have taken a shine to this Motley Fool Stock Advisor recommendation, with 97% of the more than 2,600 raters giving it a thumbs-up. "DLB has high insider ownership, has strong sales and earnings growth, high margins, and high returns on equity (ROE) -- a potentially winning combination," explains chathanatt. The bears seem skeptical about the company's ability to grow earnings and sales, without going into specifics.

What management does:
You might think that a company with Dolby's four-decade operating history would be long since done with its explosive growth phase. Think again. Revenue growth is accelerating and margins are getting fatter, and the combination is a surefire recipe for generous profits.

Margins	12/2006	3/2007	6/2007	9/2007	12/2007	3/2008
Gross	82.0%	82.0%	82.9%	84.6%	86.1%	87.8%
Operating	34.8%	35.9%	36.7%	38.3%	40.3%	42.4%
Net	25.2%	26.4%	27.2%	29.6%	30.4%	31.2%
FCF/Revenue	35.3%	29.0%	31.3%	31.6%	34.4%	33.7%

Growth (YOY)	12/2006	3/2007	6/2007	9/2007	12/2007	3/2008
Revenue	21.0%	21.1%	23.6%	23.1%	30.3%	33.1%
Earnings	72.6%	47.4%	52.7%	59.5%	57.2%	57.4%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
It takes serious tech geekery to get into the differences between Dolby encodings and DTS or SRS alternatives, and what makes one choice better or worse than another.

It's much easier to define Dolby's stature in the audio market in business terms: Dolby collected $571 million in mostly licensing revenue in the past four quarters, while DTS stopped at $56 million and SRS at a scant $19 million. Real and Philips can boast larger sales, but mostly through products like music downloads and consumer electronics rather than audio technologies.

Dolby encodings used to be the sole domain of cinemas, but the DVD changed all that and next-generation entertainment platforms like Sony's (NYSE: SNE) Blu-ray player and the rise of high-definition, surround-sound home theaters are expanding the market even further. This company is quietly becoming a consumer giant behind the scenes.

All of these slow but steady revolutions are still going on, even amid a slow economy and jittery consumers. Dolby has beaten Street expectations with each of its last 11 quarterly reports, and I don't see why the streak should end here. Give proper respect to the earnings power of the first mover with massive market share.