The consensus analyst decrease in price targets for a number of technology stocks is being ignored by investors. Despite a downward revision in the target price, shares of Garmin Ltd. (NASDAQ:GRMN), Verisign, Inc. (NASDAQ:VRSN), and JDS Uniphase Corp (NASDAQ:JDSU) are all up from an intermediary low reached at the beginning of May, 2013.
| Company | % Change in Target | # Analysts | Current Target | Prev. Week Target | Rating |
|---|---|---|---|---|---|
| GARMIN LTD | -9.04 | 5 | $38.75 | $42.60 | 3.231 |
| VERISIGN INC | -3.62 | 5 | $45.42 | $47.13 | 3.375 |
| JDS UNIPHASE | -3.23 | 9 | $16.25 | $16.79 | 4.111 |
Data Source: Bloomberg
Is a Lowered Target Price Justified?
Analysts may be reacting to the lowered outlook provided by JDS Uniphase Corp (NASDAQ:JDSU) on May 1. The weakening sentiment is in-line with the performance of its competitors. Juniper Networks reported quarterly earnings that missed on revenue and was light on guidance. AT&T reduced its capex budget for the next two years (2014 – 2015), and the company expects the current quarter to come in below the revenue consensus of $448.4 million. JDS Uniphase Corp (NASDAQ:JDSU) expects sales to be about $420-$440 million.
In the March quarter, carrier customers delayed their capital expenditures, which hurt sales for communications test, measurement and optical communications equipment. GAAP earnings were mostly flat over the previous year, and sharply lower from the previous quarter:
| Q3 | Q2 | Q3 | Percentage Change | |||||
|---|---|---|---|---|---|---|---|---|
| FY 2013 | FY 2013 | FY 2012 | Q-T-Q | Y-T-Y | ||||
| Revenue | $ | 405.3 | $ | 429.4 | $ | 403.3 | -5.6 | 0.5 |
| Gross margin | 38.3 | 44 | 41.6 | -5.7 | -3.3 | |||
| Operating margin | -5.3 | 3.5 | -1.6 | -8.8 | -3.7 | |||
Source: JDSU Press Release
With 235.15 million shares outstanding and $638.8 million in cash and investments, JDS Uniphase Corp (NASDAQ:JDSU) has $2.72 in cash per share. Investors should note that other non-recurring charges totaled $12.9 million in the quarter, which contributed to half of the losses in the quarter.
In the software space, Verisign, Inc. (NASDAQ:VRSN) is just 2.6% below its 52-week high. The company reported revenue of $236 million, and earnings of $0.58 per share, both beating consensus. The average target price for Verisign, Inc. (NASDAQ:VRSN) is $45.42, but shares traded recently at nearly $49.
During its conference call the company said that $844 million remains in its share repurchase program. 3 million shares were purchased by the end of the first quarter. Verisign, Inc. (NASDAQ:VRSN) has a healthy renewal rate (73.3%), though it is slightly below that of last year. Operating margins are healthy; the company guided non-GAAP operating margin to be at least 57%. This would also justify the current valuation of Verisign, Inc. (NASDAQ:VRSN), which trades at a forward P/E of 19.38.
Investors might like Verisign, Inc. (NASDAQ:VRSN)’s cash balance of $1.56 billion, but remember that only $240 million is domestically held.
Dividends Still Matter
In the GPS space, analysts lowered the target price for Garmin Ltd. (NASDAQ:GRMN) by 9% to $38.75. Gross margins rose in its last quarter, but operating margins declined to 15%. The company experienced a drop in the automotive/mobile, outdoor, and marine sales channels. Sales rose in the aviation and fitness segments.
Investors are ignoring the weak sales and light margin figures, betting that Garmin will continue to compete effectively against smartphones. Garmin Ltd. (NASDAQ:GRMN) is not lowering its expenditures for research and development. Operating expenses rose by $8 million, or 2.1% as a percent of sales, due to R&D. The company stated that the low margins in the quarter to be a seasonal occurrence, and expects it to improve in the next quarters.
Free cash flow dropped substantially compared to last year. Garmin Ltd. (NASDAQ:GRMN) reported a substantial FCF decline:
| Mar 30, 2013 | Mar 31, 2012 | |
|---|---|---|
| Free Cash Flow | $ 47,747 | $ 116,470 |
| (in thousands) |
Source: Garmin Press Release
It pays for Garmin Ltd. (NASDAQ:GRMN) shareholders to be patient. Garmin pays a dividend of $1.80, which yields 5.04%.
Conclusion
The continued froth in stock markets is supporting nearly all stocks, even companies that missed earnings expectations. The lowered target price is justified, and investors should not ignore the rising risks in the stock market. Garmin Ltd. (NASDAQ:GRMN) is still an attractive income investment whose growth depends on shifting its focus towards fitness and marine devices that have GPS. Verisign lacks any catalyst for further upside, but the company has a strong business and little competition to worry about. The rebound in JDS Uniphase Corp (NASDAQ:JDSU) may not hold: the sector is facing capex cuts from its customers, and 2013 will be a tough year.
The article 2 Tech Stocks to Buy and 1 to Avoid as Target Prices Are Lowered originally appeared on Fool.com and is written by Chris Lau.
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