Don’t Give Up on Tessera Technologies

As you can tell by the ratings history chart below, Tessera Technologies (TSRA) has been an Ockham favorite for quite some time.  Their stock is having a heck of a day today up nearly 13% after raising second quarter revenue guidance to $74-$75 million from $67-$70 million previously.  The improved outlook for the quarter which ends later this month is due primarily to increased royalties from its micro-electronics customers.  If the company is able to achieve even the low end of the new guided range, it would represent sales growth of nearly 19% over this quarter a year ago.

Tessera is in the business of licensing miniaturization technologies, and such technologies are used in consumer electronics like smart phones and flat screen televisions.   Clearly, business is improving at a better clip than originally anticipated, as consumer electronics are constantly trying to fit more “stuff” into smaller, sleeker packages.  The company has grown relatively well aided by some savvy acquisitions in the last few years, but analysts have forecast that growth to stall on a full year basis this year (full year estimates call for sales to fall more than 5%).

We are reiterating our Greatly Undervalued rating as of this week’s report, which is our most bullish stance on a stock.  According to our methodology, TSRA is trading well below its historically established ranges of both price-to-cash earnings and price-to-sales, even after today’s nice run.  For example, in Tessera’s relatively short time as a publicly traded stock (going on 7 years) the company has normally traded for 30.1x to 51.4x times cash earnings per share.  However, analysts are expecting TSRA to pull in about $1 in EPS this year, so it trades for just about 19x cash earnings at current valuations.  The comparison is similar for price-to-sales as well.

We believe that this company has unjustly fallen out of favor with the market and can reasonably trade higher.  Growth may be slowing in comparison to the last few years, but with nearly 2000 patents to its name, Tessera is not finished innovating and miniaturizing.  We believe long term investors have not missed the boat on this stock; although, it would not hurt to ease into the stock after its 13% gain today.

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Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

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