GIGM - Sector: Technology---Industry: Multimedia & Graphics Software

[David Randolph]

In Q4 GIGM had a net profit margin of 32%. This is one of the fattest I've ever seen. This means that for every $1 in incremental sales, $0.32 go to the bottom line.

I expect great things from GIGM in 2007 and beyond and I'll hold the stock through the ups and downs, as I'm pretty much certain the "ups" will be bigger than the "downs".

[ScottishTrader]

GIGM is looking a bit toppy - the recent high of 14.50 made a perfect tag of the top of the long term channel.  After buying the positive ER, I sold today on the second bearish engulfing candle for just over an 8% gain on the trade.  I'm watching out for a break of the 13.50 level as a potential short setup.  Bearish divergences on both MACD and RSI suggest that it could be due for a pullback here, possibly to the 50MA or 12.50 support.  Should also see some support at $13 if it does break down.

[berloga]

I applaud David for being resolute in the tough market conditions. As it turns out, it is the most difficult part to learn in the trading business.

[ScottishTrader]

Potential H&S top on the 30 minute chart.  GIGM has been making lower lows over the last couple of days, and looks at risk of breaking down here.  The neckline of the H&S pattern is at 13.58, and a break of this level would put a traget of 12.63 IN PLAY.

One could also argue that it has been forming a falling wedge (continuation) pattern.  For this pattern to resolve itself, GIGM needs to break above 13.90, and really 14.00, which could signal the beginning of a next leg up.

I'm agnostic for now, but may look to take a corresponding position depending on which way the stock decides to move.

[danman3459]

Maybe this will give it a little kick in the butt?

Zacks PEG Ratio Strategy Highlights: GigaMedia Ltd., The Manitowoc Company, National Oilwell Varco, Incorporated and Spirit AeroSystems Holdings

Apr 2, 2007 08:32:15 (ET)

CHICAGO, Apr 02, 2007 (BUSINESS WIRE) -- If you like to use a company's P/E ratio to determine its value, then you'll love using the PEG Ratio Profit Track. The PEG Ratio can calculate if a stock is undervalued relative to its expected future growth. Find out which companies offer the greatest value regardless of growth rate to enjoy stellar returns. Four stocks meeting this screen's exclusive criteria are: GigaMedia Ltd. (GIGM, Trade ), The Manitowoc Company, Inc. (MTW, Trade ), National Oilwell Varco, Incorporated (NOV, Trade ) and Spirit AeroSystems Holdings, Inc. (SPR, Trade ). View the entire list of stocks for the PEG Ratio Profit Track at http://at.zacks.com/?id=1837

Here are details about four companies currently identified by the PEG Ratio Profit Track:

GigaMedia Ltd. (GIGM, Trade ) offers a PEG ratio of 0.54. The company recently announced fourth-quarter earnings of 17 cents per share, surpassing the consensus estimate by 42%. GIGM noted that its net profit grew over four times in 2006, and its record fourth-quarter operating results and recent strategic developments point to an even stronger 2007.

The Manitowoc Company, Inc. (MTW, Trade ), a Zacks #1 Rank (Strong Buy) company, sports a PEG ratio of 0.50. The company recently increased its full-year 2007 earnings outlook to a range of $4.20 to $4.30 per share from its previous guidance of $3.85 to $4.00. Wall Street followed suit by increasing one month-ago forecasts of $4.03 per share to the current level of $4.30. In late January, MTW posted fourth-quarter earnings of 69 cents per share, before special items, which eclipsed the consensus estimate by a penny.

National Oilwell Varco, Incorporated (NOV, Trade ), another Zacks #1 Rank (Strong Buy) company, will release results for the first quarter in late April. In early February, NOV reported fourth-quarter earnings of $1.35 per share, beating the consensus estimate by 29% and outperforming the year-prior period. The company mentioned that each of its three segments reported higher year-over-year sales and profits for the year. NOV's PEG ratio currently stands at 0.52.

Spirit AeroSystems Holdings, Inc. (SPR, Trade ) released financial results for the fourth quarter and full-year 2006 in early February. SPR stated that during 2006, it expanded its customer base in the 100 seat plus market through the acquisition of Spirit Europe, won yet to be announced programs with new customers and successfully managed production rate increases on existing programs. Not only does this value stock satisfy the criteria of this Profit Track, but with a PEG ratio of 0.21, it currently offers the lowest PEG ratio under the PEG Profit Track.

Discover all the current stocks currently on the PEG Ratio Profit Track at: http://at.zacks.com/?id=1868

About Profit Tracks

What is a "Profit Track"? Each Profit Track is a successful stock picking strategy with proven results through the Bear Market of 2001-2002 and the Bull run started in 2003. On Zacks.com we have created these nine unique screens to offer investors great strategies to potentially outperform the market in the years ahead. In 2006, the Low Price Stocks strategy was the top performing Profit Track with a return of +56.5% followed by the Discounted Fundamental screen with a +34% return. To see all nine strategies along with philosophy, past performance and current stocks, go to http://at.zacks.com/?id=1838

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[David Randolph]

Maybe this will give it a little kick in the butt?

Yep, nice kick

That PEG Ratio looks cool, I wonder if I shouldn't use it too. Here are two articles explaining how the PEG Ratio works, its advantages and disadvantages:

PEG ratio

How The PEG Ratio Can Help Investors

I believe the answer to the "is this stock undervalued or overvalued?" question needs a much deeper study than the P/E Ratio or the PEG Ratio for that matter. I believe it is a matter of designing reasonable long term estimates, given current fundamental trends, and the share price growth rate one can derive from those long term estimates. This share price growth rate can also be called the projected Return on Investment. As a rule of thumb, if it is more than 16%, the stock is undervalued, if it is less than 8%, it is overvalued.

For GIGM, growth in revenues in 2006 was 113%, and net profit margin was 32%. If this growth rate continues for, say, 3 years, revenues in 2009 will be $908 M and net income will be $291 M.

If we apply a PEG Ratio of 1 to this estimate, lol, GIGM would then be a 113*$291 M = $32.88 B market cap company, or, at current share count terms, a $644 stock

But I doubt the market would attach an earnings multiple of 113 to GIGM, it is just too high. But why not 50? It should have 50 (for example, BIDU trades at 54 times earnings), right here, right now, and that would mean a price per share of $29.4, just considering 2006 net income.

Well, we'll just keep monitoring GIGM like we do with all other holdings of the Main Portfolio, I'll keep holding the stock.

[buddjas1]

I remember GIGM from a long time ago, when IBD listed GIGM as one of the best stocks under $5.  I almost went all in GIGM (as was my strategy then).  I could be retired right now.

Great pick.

[David Randolph]

I remember GIGM from a long time ago, when IBD listed GIGM as one of the best stocks under $5.  I almost went all in GIGM (as was my strategy then).  I could be retired right now.

Great pick.

The problem when one goes "all in" is his hands get weaker. I doubt you would hold it through all the ups and downs the stock had (and there were many).

I'm starting to see there's no trick at all in knowing what is the right thing to do. The hard part is to resist all temptations from the Devil and actually do it right over many years.

The problem with spending too much time doing wrong things is time is precious and probably one of the most important factors for being truly successful in the markets.

[David Randolph]

GIGM shot up 4.43% to a new 7 year high, on volume above average. That PEG Ratio thing probably has been a eye opener for many people. GIGM's fully diluted EPS grew from $0.12 in 2005 to $0.51 in 2006, that's a 325% growth.

According to the "PEG Ratio" basic premise, GIGM should be trading at a PEG ratio of 1, so the Price to Earnings Ratio should be 325, and that would put GIGM at $166 a share

Of course, the theory can't be followed blindly, and it is impossible for the market to value GIGM at 325 times earnings, only if a speculative bubble were to occur, but probably that won't happen for many years.

What is worth a good laugh are analysts estimates for 2007 and 2008, absolutely ridiculous. GIGM already made $0.60 basic EPS in 2006, and analysts are still expecting just $0.61 for 07 and $0.81 for 2008:



There's huge room for positive surprises here. No doubt I'll keep holding GIGM.

[David Randolph]

Nothing changed on GIGM, I'll keep holding it.

[David Randolph]

Ok, let me start designing the graphs I need to get to the four variables of the long term valuation model for GIGM, starting by the historical share count and market cap:



Between the company's IPO in 2000 and 2005 the share count remained very stable, just above 50 million shares. But recently there was a small up tick to the current 51,446,715 shares outstanding. This is due to convertible debentures following the Fun Town acquisition.

It is interesting the company has been redeeming some convertibles, even though the basic share count rose, as we can see at the following balance sheet screen shot:



The first column is Q4 2006, the second is Q3 2006 and the third is Q4 2005. From the third quarter, the share count increased 0.82%, and the company redeemed 1,236,785 of convertible debentures, reducing the potential share count increase by 2.4 percentage points, from 17.46% to 15.06%.

Given this I would say GIGM will probably have about 56 million shares outstanding in 2009, which means a dilution factor of 1.0287, ok, let's round it up to 1.03, or 3% dilution CAGR.

So, the first variable to the valuation model, the dilution factor, is 1.03. We'll take care of the other three variables over the following updates.

I'll continue holding GIGM.

[David Randolph]

I also need to consider the balance sheet to get to that dilution factor, let's do that today:



I don't remember why I said GIGM's balance sheet wasn't particularly strong in the initial video analysis, it seems pretty healthy now, with a current ratio of 3.76 and zero long term debt.

Given this balance sheet analysis I maintain the 1.03 dilution factor calculated over the previous update. Tomorrow we'll estimate the revenue CAGR.

I'll keep holding GIGM.

[David Randolph]

Today is "revenue day" for GIGM. Let's study the historical trends:



If we consider the growth between 2004 and the average estimate for 2007 revenues, we get a revenue CAGR of 66.7%. Revenue growth in 2006 was 114% and analysts are predicting 59.3% for 2007. What puzzles me is management said it expects even stronger growth in 2007 when compared to 2006 growth rate, so probably analysts will have to upgrade their estimates.

When GIGM reports Q1 2007 I see at least 100% growth from Q1 2006. Q1 2006 revenues were $18 M.

Considering all this and the explosive markets the company is operating (online gambling and gaming, and the chance to monetize a lot of its free services), I'll consider a revenue CAGR for the next 3 years of 50%, or 1.5.

I'll keep holding GIGM, touching technical support yesterday.

[David Randolph]

GIGM is getting a bit annoying, technically breaking down yesterday. I'm glad we'll get to the final valuation model for GIGM today, because I need reassurance that this is an outstanding holding.

Let's check the EPS and net profit margin trends:



I believe the above graph shows a fantastic picture. I'll take 30% as my net profit margin estimate. As for the fourth variable I need to estimate, I'll naturally assume the Internet Software & Services industry average earnings multiple of 38.73.

Let's see the results of the valuation model for GIGM:



We get an extremely attractive share price CAGR of 71.9% and an optimal selling price today of $46.05. So my take is people selling don't have a clue of what they're doing and GIGM will soon be at new highs above $15.5.

I'll keep holding GIGM.

[dmdray69]

Hey David,  I saw this posted on the yahoo board by sfhiddendragon.  The poster got the 2 articles from yahoo-chinese and translated them with the following summaries.  I wondered what you might think about it.  Thanks, Ray
#1. http://tw.news.yahoo.com/article/url/d/a...

This article is about why the Xbox360 Mahjong game got delayed. It basically said that a lot of Asian game developers(mostly from TW and SK) are having some problems while transforming from PC/online game developers to XBOX games providers. And MSFT is holding a meeting with these companies in HK now to solve the problems. In term of our funtown, according to the article, since this Mahjong game will target the global market, MSFT said they don't wnat any "gambling feel," so instead of using the virtual money(funtown golden coins), they ask funtown to charge users based on the Time they play. Funtown is adjusting their software, should be ready later this year.

#2. http://tw.news.yahoo.com/article/url/d/a...

This is about funtown has to compensate their members for about 8m NTD(about 240k+ USD) due to an operational mistake at their horse racing game on March 22nd.