I used to love her, but I had to kill her.

It seems apropos to open this column with an auditory link. We are, after all, talking about corporate sound-garden Dolby Labs (NYSE: DLB) today. As you've probably heard, the three-time Motley Fool Stock Advisor recommendation reported fiscal Q1 2008 earnings last week. To borrow a phrase from American Idol's Randy Jackson, Dolby "blew out the box."

Citing "Dolby's strength across a broad range of entertainment platforms, including DVD [for example, Sony (NYSE: SNE)], PC [Microsoft (Nasdaq: MSFT) is a marquee client], broadcast [NDS Group (Nasdaq: NNDS)], cinema [Regal Entertainment (NYSE: RGC)], and gaming [Sony and Microsoft again]," CEO Bill Jasper reported a string of simply fantabulous numbers:

  • Q1 sales rocketed up 44% to $150.2 million.
  • Profits did even better -- up 56% to $0.42 per share.
  • And the best profits of all, the ones you can count in cash, leapt 65%. Free cash flow for the quarter surged to $74.8 million -- just a stunning increase over last year's Q1.

What's more, Jasper upped guidance from what he had told us to expect just three months ago. Dolby now predicts that it will book between $575 million to $615 million in revenue over the course of this fiscal year, and earn between $1.34 and $1.44 per share thereon. That's a 2.5% bump in sales growth, and 5% better profits at the midpoint of guidance.

But the price ain't right
So in a word, the news was "superb." Why, then, would I "kill" any thought of investing in Dolby today? Basically, it all comes down to price.

Mind you, it's not the 39 P/E that scares me. Dolby earns so much more cash profits than the GAAP accounting standards allow it to report as "net earnings" that I spend little time worrying about this firm's P/E. But I do worry about those cash profits.

You see, Dolby's cash profits are cranked up to 11, but the last 12 months' results still have this stock selling for almost 30 times its trailing free cash flow. That seems awfully rich to me, when you consider that most analysts expect Dolby to grow at about 18% per year going forward. So to me, this is a case of: "Love the company, but kill your buy order on the stock."

For more Foolishness on Dolby:

Dolby is a Motley Fool Stock Advisor recommendation, and Microsoft is an Inside Value pick. A 30-day trial to either newsletter is free.

Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool's disclosure policy also goes to 11.