Check Your Chips for This Cash-Rich Value Play

I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit that some growth stories are bogus -- hence this regular series.

Next up: Tessera Technologies (Nasdaq: TSRA  ) . Is this microelectronics specialist the real thing? Let's get right to the numbers.

Foolish facts

Metric

Tessera Technologies

CAPS stars (out of 5) ***
Total ratings 400
Percent bulls 92%
Percent bears 8%
Bullish pitches 50 out of 54
Highest rated peers Integrated Device Technology, DSP Group, Power Integrations

Data current as of Oct. 25.

Those Fools who doubt Tessera have concerns over the long-term viability of its patent portfolio. But that hasn't stopped the company from making claims against perceived violators, Sony (NYSE: SNE  ) and Renesas Electronics most recently.

Successful prosecution of this case could take years, and that's assuming Tessera has a legitimate claim. Either way, at current prices, 46% of the company's market value is in cash. Investors aren't pricing the underlying business for outsized growth.

"Nice play on the upcoming smart phone boom. They've been around for a while, and provide R&D, and chip miniaturization technology. Could be a take over target, or a Qualcomm in the making. Nokia's already signed on," Foolish investor forexnutca wrote in January, when Tessera was still trading for more than $20 a share.

The elements of growth

Metric

Last 12 Months

2009

2008

Normalized net income growth (41.7%) 33.8% 8.9%
Revenue growth (15.5%) 20.6% 26.9%
Gross margin 92.4% 94.3% 93.3%
Receivables growth (20.4%) (30.5%) 9.4%
Shares outstanding 49.4 million 48.9 million 47.6 million

Source: Capital IQ, a division of Standard & Poor's.

I'm usually bullish on companies that have bulging bank accounts, but the trends in this table don't speak well for Tessera. Let's review:

  • First, a growth trend in normalized net income has reversed itself, and revenue growth is down for three consecutive years. Exactly the opposite of what we'd like to see from a true growth stock.
  • Gross margin improvement has also reversed. Another bad sign.
  • Shares outstanding haven't grown much because dilution isn't necessary. Tessera's product and patent portfolio throw off tens of millions in cash flow annually.

Competitor and peer checkup

Company

Normalized Net Income Growth (3 years)

Adv. Semiconductor Engineering (NYSE: ASX  ) 2.2%
Amkor Technology (Nasdaq: AMKR  ) 7.5%
OmniVision Technologies (Nasdaq: OVTI  ) 4.9%
Siliconware Precision Industries (Nasdaq: SPIL  ) (15.1%)
Tessera Technologies (15%)

Source: Capital IQ. Data current as of Oct. 20.

Tessera doesn't stack up well in this table, but these numbers also don't tell the whole story. The company generated $73.8 million, or $1.49 per share, in free cash flow over the past 12 months.

Grade: Unsustainable
And that's why value hounds love Tessera. Not only does it have tons of cash, but also if you use enterprise value as the denominator -- an imperfect yet useful valuation metric -- Tessera trades for just seven times its trailing FCF. At that price, it really doesn't matter if Tessera can defend all of its patents. As such, I'm rating the stock to outperform in my CAPS portfolio.

Now it's your turn to weigh in. Do you like Tessera Technologies at these levels? Let the debate begin in the comments box below. You can also ask Tim to evaluate a favorite growth story by sending him an email, or replying to him on Twitter.

For further Foolishness featuring Tessera Technologies:

Interested in more info on Tessera Technologies? Add it to your watchlist here by clicking here.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Nokia is a Motley Fool Inside Value pick. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. The Motley Fool owns shares of Qualcomm and is also on Twitter as @TheMotleyFool. Its disclosure policy thinks Monty Python is sustainably funny.


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