It's a Prime Time for Tech Turnarounds

Value investors would do themselves some good by understanding the dynamics of the turnaround situation. Stocks in deteriorating fundamental situations often get much cheaper than a rational view of normalized profits would suggest. And when a fundamental recovery is nascent, the stock recovery will not be. After reacquainting myself with the turnaround conundrum of too cheap, too long and then too expensive, I will offer some of my firm's portfolio's more interesting turnaround situations.

Real Examples

Motorola(MOT), currently the subject of a hedgie bear raid, seems to present an interesting opportunity. After two quarters of strong revenue and profit gains, the market seems to doubt the staying power of this turnaround.

But adjusting for its semiconductor spinout Freescale(FSL), the stock trades for roughly $13.50. If Motorola continues progressing towards its 15% handset and corporate operating margin goals, the company could earn $1 per share in 2005. With double-digit revenue and earnings per share growth in store for next year, the shares should command a higher "turnaround" multiple. Why not the same 20 P/E multiple Tyco sports today?

Solectron(SLR) is another turnaround position my firm has established in its portfolio. The current $5 price seems expensive for a fiscal 2005 consensus EPS estimate of 26 cents untaxed. Here the market is in a normal turnaround valuation mode.

My firm's estimate of "normalized" fully taxed profits, assuming 15% revenue growth over the next 2 years, is 50 cents per share. That run rate could be hit in six quarters. A prominent Wall Street firm recently reiterated its $10 price target on the stock over the next year. It would not surprise me to see the stock go from the outhouse to the penthouse in that short time.

MRV Communications(MRVC) has been unprofitable for so long, who knows what the stock will do when the company achieves GAAP profitability in 2005. The company is a leading manufacturer of optical systems and components and should benefit handsomely if and when the major telcos ever build out their FTTP (fiber to the premises) systems.

The telcos have no choice but to replace their twisted pair "pipe" for an optical one or face complete obsolescence by the cable companies. At current prices, the shares trade for 70% enterprise value to 2005 estimated revenue. Most of their competitors trade for multiples of 2 to 5.