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Dolby's logo flashes as we settle into our movie seats for a two-hour escape. The San Francisco-based company's technologies have revolutionized the film industry, and its patents have secured a strong stream of profits.
Dolby was founded by American physicist Ray Dolby in London's Crabtree Lane area in 1965. Its first product was a noise-reduction system that was sold to the English music-recording industry. The next major breakthrough came when "Star Wars" was released in 1977, and theaters realized the superior sound of Dolby Stereo. Today, Dolby is prevalent in our home-entertainment systems, our local cinemas and even our headphones. The company continues to revolutionize the process of recording and replaying audio, and has little competition due to its nearly insurmountable technological expertise. Despite the deep recession, Dolby has posted 10 consecutive quarters of earnings per share growth. Quarterly revenue rose 18% to $204 million, as per-share earnngs climbed 22% to 60 cents on wider margins. The company's competitive advantage gives it pricing power. A pristine balance sheet is another strength. Dolby holds $566 million of cash reserves and boasts a quick ratio of more than 4. By comparison, TheStreet.com Ratings considers a quick ratio of 1 to indicate a strong liquidity position. Dolby has only $8 million in debt obligations and a debt-to-equity ratio of 0.01. The downside to superb financials is no dividend. Still, Dolby's shares are undervalued. Looking at peer valuation in the electronic-components industry, Dolby is cheap on the basis of earnings. With a price-to-earnings ratio of about 18, the stock is 37% cheaper than its average peer. Texas Instruments (TXN - Get Report) trades at a P/E of 21, Qualcomm (QCOM - Get Report) at 45 and Nidec (NJ - Get Report) at 30.