If Sigma Designs (NASDAQ:SIGM) isn't the cheapest stock in the Motley Fool Rule Breakers portfolio, it's gotta be close. But for the life of me, I can't figure out why this stock -- a purported 20%-plus grower that's beat estimates in three of the last four quarters -- is carrying a P/E in the single digits. Perhaps Thursday afternoon's report on fiscal Q1 2009 earnings will shed some light on the subject.

What analysts say:

  • Buy, sell, or waffle? Fourteen analysts follow Sigma Designs, giving it six buy ratings and eight holds.
  • Revenues. On average, they're looking for sales to leap 67% to $60.1 million.
  • Earnings. Profits are predicted to lag, rising "only" 31% to $0.42 per share.

What management says:
They say actions speak louder than words, right? So I wonder what message management meant to convey in March, when it more than doubled its stock repurchase authorization to 5 million shares?

What management does:
Logically, management should buy back shares when it believes they're undervalued. But how do you know when shares are undervalued? A few clues might be stable-to-rising gross margins (check). Rising operating margins (double check). And rising net margins (triple check). Sigma Designs' operating and net margins beat those of competitors Broadcom (NASDAQ:BRCM), ST Micro (NYSE:STM), and Conexant (NASDAQ:CNXT) by a significant margin.

Sigma Designs' sales to customers ranging from AT&T (NYSE:T) to Motorola (NYSE:MOT) to UT Starcom (NASDAQ:UTSI) more than doubled last year, giving rise to a significant increase in profits per diluted share. And with repurchase authorization now covering nearly 20% of shares outstanding, I wouldn't be at all surprised to see per-share profits continue rising.

Margins

10/06

2/07

5/07

8/07

11/07

2/08

Gross

49.2%

48.7%

48.8%

50.5%

51.9%

51.0%

Operating

0.7%

6.4%

11.2%

15.8%

23.3%

25.9%

Net

1.3%

6.8%

11.5%

15.8%

22.5%

31.7%

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:
So Sigma Designs' revenue and profits are rising. Great. But can you buy a piece of the action at a reasonable price? Actually, yes, you can. Sigma Designs shares no longer present quite the bargain I described back in March. But they're still selling for less than nine times trailing earnings and 18 times trailing free cash flow.

Listen, I don't know for a fact that Sigma Designs will be the leader in making chips for IP television (IPTV), digital video recorders (DVRs), and video-on-demand (VOD) -- or any number of other high-tech acronyms making the rounds these days. Maybe it won't. Broadcom could eat its lunch, or Sigma Designs could just implode all on its own.

But if the analysts are right, and Sigma Designs hits anywhere near the 26%-plus annualized growth they're projecting for it, the stock is an absolute screaming buy at today's price. In short, Sigma Designs is priced for disaster, and any result better than that should reward investors handsomely.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.