What's the Deal With Dolby?

Most everyone who's anyone on Wall Street took a hit yesterday. Market pundits seem to be ascribing the selloff primarily to worries over an impending General Motors (NYSE: GM  ) bankruptcy, or lackluster net interest margins at banks like Wells Fargo (NYSE: WFC  ) and JPMorgan Chase (NYSE: JPM  ) . And if that's the case, then I can sort of understand the worries, but ...

... What's the deal with Dolby?
Dolby (NYSE: DLB  ) , the biggest name in theater and consumer electronics sound systems, sold off by more than 8% yesterday, and is leading the market downward once again today -- apparently on no news of note. Oh, there was the JPMorgan upgrade, of course. Apparently, the banker thinks that a tiny Dolby competitor by the name of Avid (Nasdaq: AVID  ) is a steal of a deal. JP points to the firm's valuation of 15 times (JP Morgan's estimate) forward earnings, and calls Avid a bargain relative to Dolby, Macrovision (Nasdaq: MVSN  ) , and DivX (Nasdaq: DIVX  ) .

There's also a Wall Street Journal report out (tip o' the hat to the Motley Fool Stock Advisor board for pointing this out) suggesting that a lesser-known stock shop called "Pacific Crest" downgraded Dolby to "sector perform" yesterday. But with all due respect to the firm in question, a downgrade from an analyst at a smaller specialty investment bank hardly seems sufficient reason to justify Dolby's 8% sell-off.

Opportunity knocks
To the contrary, Fools, I think what we are looking at here is a bona fide buying opportunity in Dolby stock. Trading as it does for just 17 times trailing earnings (and 19 times forward earnings), and with long-term growth posited at 14%, Dolby's sporting a 1.2 PEG ratio. And while that may look a little pricey, consider that the firm also boasts:

• Industry-leading profit margins -- operating margin comes to 47%, or nearly twice what Dolby's next-biggest close competitor (DTS) can claim.
• Cash profits that exceed reported net income by about 12% -- resulting in a price-to-free cash flow ratio of just 15.
• And speaking of cash ... Dolby has more than $566 million in cash and equivalents, another $244 million and change in long-term investments, and negligible long-term debt.

Foolish takeaway
Add it all up, and while I don't know that I can call Dolby a screaming buy just yet, I do detect a whispered "Buy me soon."