Hefty Profit Margins Make
Dolby Labs (DLB) an Appealing Investment
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By: Timothy Lutts
Editor
Cabot Wealth Advisory
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Published:
August 13, 2007
America has an ongoing pursuit of
happiness and an ongoing
preoccupation with entertainment.
For all the carping about hardship
in America, the fact is that
everyone buying a big screen TV, or
an iPod, or going on a trip to
Disney World, or a trip to Las
Vegas, is signaling that they've
achieved the basics, they've worked
hard enough, and now they're going
to spend some money to have some
fun!
So where’s the investment angle
here? Not in Apple (Nasdaq: AAPL). I
think Apple -- regardless of how
many million iPods, iPhones, and
iMacs it sells in the year ahead --
is too well loved to be a good
investment here. All the stock's
great growth phases have begun when
the company was unloved. Today, I
think you're better off looking for
companies with great growth
prospects that are not well loved.
And happily so.
Most people over a certain age will
remember Dolby Labs (NYSE: DLB,
$35.44) as
the company whose noise-reduction
system saved us all from tape hiss
back in the mid-1960s, when
reel-to-reel tape machines ruled the
audio world. Now the company has
predicted that it would continue to
capitalize on the growth of HDTV and
personal computers. Dolby's revenues
come from royalties on its patents
for improving the sound of DVD
players and other electronics. Most
movie theaters also use Dolby to
improve sound. This is a straight
revenue/profit story, supplemented
by high profit margins, and Dolby
looks to be on track.
Dolby's sound-enhancing wizardry can
be found on both HD DVD and Blu-ray
disks, on PCs, game consoles, and
portable media players, and on sound
systems from headphones to movie
theaters. According to one estimate,
over 2.2 billion devices have been
built to include one or more Dolby
technologies, which helps to explain
how roughly three-quarters of the
company’s revenues are generated by
licensing.
Dolby Laboratories has also
announced the decision by the
Digital Video Broadcasting Project (DVB),
an industry consortium committed to
designing global standards for
digital TV, to include Dolby Digital
Plus audio technology as an option
in the latest version of its
Internet protocol television (IPTV)
specifications.
IPTV. It's going to be big, and
Dolby’s going to be part of it.
So, while Dolby is a well-respected
name -- and for good reason -- it's
not a well-loved stock. First, it
has made no one rich; it came public
only two years ago, and it's "just"
+88% above its IPO price today.
And second, many baby-boomer
investors still identify Dolby best
with its original tape-oriented
products, and assume the company is
therefore on the trailing edge of
technology, instead of the leading
edge. But Dolby is a great example
of a company that has used its
patents to erect a high barrier to
entry. And today, partly because
these barriers give it pricing
power, and partly because it has a
royalty-heavy revenue stream, it
boasts profit margins of 28.6%. I
think it's worth checking out.
Timothy W. Lutts
Editor
Cabot Wealth Advisory
About Timothy Lutts
[includes/bios/lutts.htm]
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