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HLIT Update
Closed $9.97 August 31 2007
With Harmonic, HLIT, up over 25% from its August lows and up 18% in the last two days it’s time to take a look.

Recent Developments

Q2 2007 Results Reported July 25th
Net sales up 34% to $71.3 million. Gross margins improved and GAAP earnings were once again positive at $0.08 a share.
“Business Outlook: The Company anticipates net sales for the second half of 2007 to be in a range of $150 to $160 million and gross margins to be 44% to 45% on a non-GAAP basis, excluding stock-based compensation expense and the amortization of intangibles. GAAP gross margins for the same period are anticipated to be in a range of 42% to 43%.”

Acquires Rhozet
$15.5 million purchase price; 1.1 million HLIT shares and cash, anticipated to close by the end of July. Excluding charges for the amortization of intangibles, the transaction is expected to be neutral to Harmonic's earnings per share for the second half of 2007.
"Viewers are increasingly turning to the Internet and mobile devices to watch an ever-expanding range of video content," said Patrick Harshman, President and CEO of Harmonic Inc. "Today's video programming includes everything from television shows and movies created for traditional broadcast and on-demand distribution, to webisodes and user-generated content specifically developed for online and mobile distribution. Rhozet's software transcoding technology is a natural extension to Harmonic's market-leading IP-enabled compression and on-demand solutions, and we believe that our combined solutions will make it possible for service providers to deliver superior quality video to virtually any device."

As I have said before, or at least thought if not said, the key for HLIT is to continue increasing eps This is the stage that companies can provide fantastic returns to shareholders. The newly positive increasing earnings bring the P/E down from stupid levels to reasonable levels. Despite the 25% run-up HLIT is still attractively priced for a company analysts are estimating 27% 5 year growth for.
Forward P/E (fye 31-Dec-08): 18.13
PEG Ratio (5 yr expected):0.85

For the next two quarters analysts are expecting $0.12 and $0.13.
This compares to revenues of $62.86Mand $75.34M and eps of $0.10 and $0.13 for 3rd and 4th quarter 2006. As HLIY have guided to $150-160M and slightly improved gross margins I think the high estimates of $0.13 and $0.16 are certainly possible.

Still Long and holding, though the October $10 covered call trading position I entered back at the end of April is now likely to swell my cash coffers and leave me with less HLIT. Despite the recent rise I now need to take a deeper look to see if I should be reinvesting those profits in HLIT. Very rough dirty quick look, past 6 months eps of .18 plus high estimates for next 6 months of .29, gives $0.47 eps. With such outstanding growth investors may pay up to a P/E of 40, meaning the best possible return in 6 months is almost 90%. Using consensus eps for next six months and same other figures $.41*40=$16.4/9.97-1 = a 65% return. All these estimates are best case, conservative figures would obviously be much lower.
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