Tech Stocks Still Have a Bright Future

Many technology stocks have plunged 50% or so in the past three months. That’s due to fears that the slowing economy will prompt businesses and consumers to buy fewer computers and cellphones.

We feel proven tech leaders, such as these six, have a lot of appeal. They all have plenty of cash for research, and little debt. New products from this research will give them a competitive advantage, and spur their sales as the economy rebounds.

As well, all six now trade for about 10 times earnings, down from 30 to 40 times a few years ago. Their p/e’s should eventually creep up, as their research spending pays off. That could lead to big gains for patient investors. But only some are buys right now.

AGILENT TECHNOLOGIES INC. $19 (New York symbol A; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 350.0 million; Market cap: $6.7 billion; WSSF Rating: Average) makes testing systems that help manufacturers improve the quality of electronic products such as cellphones.

In the past few years, Agilent has expanded its Bio-Analytical Measurement division, which supplies measurement equipment to medical research labs and drug developers. This business now accounts for 40% of Agilent’s total sales. It’s also much less cyclical than the electronics division, which helps cut Agilent’s risk.

In the fiscal year ended October 31, 2008, Agilent’s earnings rose 15.5%, to $729 million from $631 million in the prior year. Earnings per share grew 26.5%, to $1.96 from $1.55, on fewer shares outstanding. These figures exclude restructuring and other unusual items. Revenue rose 6.5%, to $5.8 billion from $5.4 billion.

Agilent spent $704 million (12.2% of revenue) on research in fiscal 2008, up 2.8% from $685 million (12.6% of revenue) in fiscal 2007.

Thanks to this spending, Agilent has developed a new test for melamine in food following several cases of contamination in China. In sufficient amounts, melamine can lead to kidney failure. Growing concern over food safety standards in developing countries should spur strong demand for these systems.

Agilent has cash of $1.4 billion or $4.08 a share, so it can continue to invest in research or make acquisitions. Long-term debt of $1.5 billion is also a reasonable 22% of its market cap. Agilent’s earnings in fiscal 2009 will likely grow to around $1.95 a share, and the stock trades at 9.7 times that forecast.

Agilent is a buy.

VERIGY LTD. $9.00 (Nasdaq symbol VRGY; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 57.8 million; Market cap: $520.2 million; WSSF Rating: Extra risk) designs and makes test systems used in the production of computer chips, flash memory and high-speed memory.

The company aims to improve its prospects with new technology that combines several functions onto a single chip. That lets manufacturers use fewer chips, which cuts their costs.

However, these new products currently account for just a small portion of Verigy sales. Due to slowing demand for computers, Verigy’s earnings before onetime items in the fiscal year ended October 31, 2008 fell 32.7%, to $72 million from $107 million a year earlier. Earnings per share fell 33.5%, to $1.19 from $1.79. Sales declined 9.2%, to $691 million from $761 million.

Verigy is still debt free, and has cash of $340 million or $5.88 a share. That gives it plenty of room to fund research (15% of fiscal 2008 sales) and buy back shares.

Verigy stands to gain from the increasing complexity of chips. It’s also doing a good job selling services, such as consulting and repairs. That cuts its reliance on equipment sales. The stock now trades at 9.0 times its forecast earnings for fiscal 2009 of $1.00 a share.

Verigy is a buy.

NVIDIA CORP. $7.60 (Nasdaq symbol NVDA; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 556.6 million; Market cap: $4.2 billion; WSSF Rating: Average) designs 3D chips for computers, video game consoles and other devices.

Slowing sales of new computers have hurt Nvidia’s shares in the past few months. Restructuring charges and higher warranty costs related to defective chips have also dampened its earnings.

In its third fiscal quarter ended October 26, 2008, earnings before one-time items dropped 57.8%, to $111.4 million from $264.2 million a year earlier. Earnings per share fell 54.5%, to $0.20 from $0.44. Revenue declined 19.5%, to $897.7 million from $1.1 billion. That’s partly due to growing price competition among video chip makers.

Despite the slowdown, Nvidia continues to spend heavily on research (23.7% of revenue in the latest quarter). That has led to several promising new products, including an advanced graphics chip for Apple’s new notebook computers.

Nvidia’s restructuring should expand its long-term prospects. It also holds cash of $1.3 billion or roughly $2.35 a share, and has no long-term debt. The stock now trades at 13.6 times its projected fiscal 2009 earnings of $0.56 a share.

Nvidia is a buy.

ADOBE SYSTEMS INC. $23 (Nasdaq symbol ADBE; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 531.0 million; Market cap: $12.2 billion; WSSF Rating: Average) makes software that lets computer users easily create, edit and share electronic documents in the popular PDF format. It also makes software that graphic designers use to create print publications and web pages.

Excluding one-time items, Adobe’s earnings per share in its third fiscal quarter ended August 29, 2008 rose 11.1%, to $0.50 from $0.45 a year earlier. Revenues grew 4.2%, to $887.3 million from $851.7 million. The company spent $170.1 million (19.2% of revenue) on research in the latest quarter, up 4.2% from $163.2 million (19.2% of revenue) in the year earlier quarter.

In October, 2008, Adobe launched its new Creative Suite 4 software program. This new version makes it easier for users to design web sites that include features such as animation and live video. Due to the growth of the Internet over the past few years, Creative Suite now accounts for over 55% of Adobe’s total revenues.

Adobe holds cash of $2.0 billion or $3.77 a share. Long-term debt of $350 million is a low 3% of its market cap. That gives the company plenty of room to finance new product development, particularly on software for cellphones and other mobile devices that can access the Internet.

Adobe now trades at 13.2 times this year’s forecast earnings of $1.74 a share. That’s reasonable in light of its market share and growth prospects. However, the stock will probably make little progress until the overall economy improves.

Adobe is a hold.

AUTODESK INC. $17 (Nasdaq symbol ADSK; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 226.2 million; Market cap: $3.8 billion; WSSF Rating: Average) makes Auto- CAD, the world’s leading computer aided design program. AutoCAD helps engineers and architects design machinery and buildings. The company also makes software that filmmakers use to create special effects.

Autodesk’s shares have dropped 50% in the past two months. That’s partly because slowing construction activity could hurt demand for its 3D building design software. The company is now cutting costs, which should help it remain profitable if sales weaken.

In its third fiscal quarter ended October 31, 2008, Autodesk’s earnings before unusual items rose 11.0%, to $130.0 million from $117.7 million a year earlier. Earnings per share rose 14.3%, to $0.56 from $0.49, on fewer shares outstanding. Revenue grew 12.8%, to $607.1 million from $538.4 million.

In the latest quarter, an acquisition, favorable foreign exchange rates and strong sales in emerging markets boosted revenues and earnings. Europe, Middle East and Africa revenues rose 27% (20% excluding currency gains). Asia Pacific sales rose 12% (9% excluding currency). Revenues from the Americas fell 1%.

Autodesk is debt free, and holds cash of $933.2 million or $4.12 a share. That should let it maintain its high research spending (22.3% of revenue in the latest quarter). The stock now trades at 10.3 times its likely fiscal 2009 earnings of $1.65 a share.

Autodesk is a buy.

SYMANTEC CORP. $12 (Nasdaq symbol SYMC; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 836.0 million; Market cap: $10.0 billion; WSSF Rating: Average) makes software that helps protect computers from viruses and electronic attacks. Its best-known product is the top-selling Norton Anti-Virus program.

Symantec continues to make acquisitions that strengthen its current products. For example, it recently purchased UK-based MessageLabs, which offers online software that helps users protect their email and instant messaging services from spam and junk emails.

To put the $695 million purchase price in context, Symantec earned $311.2 million in its second fiscal quarter ended October 3, 2008, up 18.5% from $262.6 million a year earlier. Per-share earnings grew 27.6%, to $0.37 from $0.29, on fewer shares outstanding. These figures exclude unusual items. Sales grew 7.0%, to $1.5 billion from $1.4 billion.

Symantec continues to do a good job expanding sales to businesses, which cuts its reliance on the more volatile consumer market. It generally sells its products and services to corporate clients under long term contracts, which gives it steady revenue streams. The company’s corporate operations now supply 70% of its total revenue.

Symantec spends about 14% of its revenue on research. That helps it maintain its lead in the rapidly changing field in which it operates. Symantec holds cash of $2.3 billion or $2.76 a share, so it has plenty of flexibility to expand research or make further acquisitions.

The company should earn $1.27 a share in fiscal 2009, and the stock trades at 9.4 times that estimate.

Symantec is a buy.