At Crabtree Asset Management, our stocks are like our kids: we love all of them equally. But three in particular are standing out in the summer heat. We believe each has solid fundamentals and is riding the wave of an established global trend.
Yet each has also been under a cloud, causing its share price to be held back from advancing or to drop outright and stay down. But we believe that each company has merely ‘backed up’ before heading higher in the quarters and years ahead. We own all three in the Crabtree Technology portfolio on the Covestor.com platform and we think you should consider taking a look at them.
Audience (ADNC)The Basics:
Market Cap: $288 million
Forward P/E: 16.7 (CY 2014)
Revenue Growth in Last Quarter: 52% year-over-year
Business: Electronics for Audio Processing
Trend: Voice-activation of Everything
The Thesis
Audience is a “play” on voice-activation, whether by improving voice quality of mobile phones, or improving the clarity of voice-recognition systems. There is widespread agreement that Audience has class leading technology in these areas. Moreover, only a small (single-digit) percentage of the 1.75 billion cell phones sold worldwide in 2012 had any kind of dedicated voice processing chip. Based on the above information, we believe that Audience’s market opportunity is vast.
In 2012, Audience was “designed out” of Apple’s iPhone 5 after having been included in earlier iPhone models. This cut the stock in half but it has recovered based on deeper penetration with other handset vendors, including Samsung (Audience has content in the Galaxy S4), Huawei and LG.
The Negatives
Although the Galaxy S4 set sales records for its first month of sales earlier this year, sales slowed in May, and this perceived weakness has compressed stock valuations of suppliers like Audience.
The Bottom Line
Audience’s ‘problems’ are the result of perception, not reality. The company hasn’t lost share with its customers and the larger trend for voice quality remains very much intact. Audience stock has stabilized in the $13 range, and earnings estimates for 2013 and 2014 are higher now than they were in April. The risk-reward equation remains very much in Audience’s favor.
Himax Technologies (HIMX)
The Basics:
Market Cap: $965 million
Forward P/E: 9.2 (CY 2014)
Revenue Growth in Last Quarter: 5.4%
Business: Semiconductors for Flat-Panel Displays
Trend: A screen on every device.
The Thesis
Himax combines a solid business (driver ICs for flat panel displays) with exposure to new display form factors, including wearable computing devices like Google Glass. Conservatively run, HIMX has a modest valuation, reliably generates cash and has seen years of research on LCOS (“liquid crystal on silicon”) technology start to pay off with design wins.
The Negative(s)
Himax’s largest shareholder, Taiwan flat-panel maker Innolux, abruptly decided to sell off its entire 25.4 million ADS position in June. While these were secondary shares and therefore cause no dilution, the sudden availability of so much stock pushed the share price down by a third; from $7.67 on May 20 to $4.87 on June 24.
Additionally, early confidence that Himax had a design win for Google Glass has not yet been officially confirmed, although credible sources still believe it to be true. Moreover, early excitement for Glass has faded to concern that it (like, perhaps Segway) is much more of a niche product than a widely accepted consumer electronics item.
The Bottom Line
Himax is cheap and executing well; the Innolux shares have now been distributed and the stock no longer embeds a meaningful contribution from Google Glass.
Tetra Tech, Inc. (TTEK)The Basics:
Market Cap: $1.5 billion
Forward P/E: 13.0 (FY 2014)
Revenue Growth in Last Quarter: 9%
Business: Environmental Engineering and Remediation.
Trend: Paying the real costs of a carbon-based economy
The Thesis
Tetra Tech has several product and service lines, but they all revolve around environmental engineering. In particular, their Technical Support Services is a direct “play” on the huge increase in oil and natural gas exploration and production in North America. Faster depletion rates of newly drilled wells, as well as the use of “fracking” will potentially provide a multi-year demand cycle for environmental protection.
The Negative(s)
Tetra Tech just ‘kitchen-sinked’ its current quarter, lowering guidance sharply for the quarter and the full fiscal year, ending September 30. The revised outlook is the result of a) an abrupt slowdown in its eastern Canada operations where a weak local economy, lower tax receipts and slower government procurement processes have combined to reduce business; and b) sequestration-related payment delays from U.S. Government entities.
The Bottom Line
Tetra Tech has had a difficult spring. But their problems reflect issues over which they have no control and do not reflect competitive pressures. The larger trends remain intact, the company has a history of execution and cash generation and a $100 million stock buyback should provide support to the share price.
The investments discussed are held in client accounts as of June 30th, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Certain information contained in this presentation is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. The manager believes that such statements, information and opinions are based upon reasonable estimates and assumptions.
