5 Undervalued, Unloved Technology Stocks

BOSTON (TheStreet) -- Technology stocks, which led the equity market in the past two months, fell sharply after Cisco (CSCO) revealed earnings and sales guidance that trailed analysts' expectations on Nov. 10. Cisco has tumbled 19% since then. Other technology stocks have been punished. Here are five high-quality technology companies selling for bargain prices. They are ordered by forward earnings multiple, from cheap to cheapest.

5. Microsoft ( MSFT) is the world's largest software company, selling the Windows operating system and Office product suite. It's a Dow component and technology bellwether. Since 2007, it has grown sales 6.7% annually, on average, and boosted earnings per share 11% a year. Yet, its stock suffered 9.1% annualized losses over that span.

Quarter: Microsoft's fiscal first-quarter profit increased 51% to $5.4 billion. Earnings per share advanced 55% to 62 cents, boosted by a smaller float, beating the consensus by 13%. Revenue grew 25% to $16 billion. The gross margin widened from 83% to 85% and the operating margin rose from 35% to 43%. Microsoft held $44 billion of cash at the end of the quarter and $11 billion of debt, translating to a quick ratio of 2.1 and a debt-to-equity ratio of 0.2. It increased its dividend from 13 cents to 16 cents, equaling a yield of 2.5% with a 24% payout ratio.

Valuation: Microsoft trades at a sizable discount to comparable technology investments. Its stock sells for a trailing earnings multiple of 11, a forward earnings multiple of 9.5, a sales multiple of 3.3 and a cash flow multiple of 8.4, 65%, 55%, 79% and 50% discounts to software industry averages. Its PEG ratio, a measure of value relative to predicted long-run growth, of 0.7 signals a 30% discount to estimated fair value. Of analysts covering Microsoft, 30 advise buying its stock and 11 recommend holding. None say to sell. A median target of $32.95 implies 27% upside.

Catalyst: With nearly $34 billion of net cash, Microsoft has ammunition for buybacks, dividend boosts and acquisitions, all of which are beneficial to shareholders. It has completed two acquisitions, for Sentillion and AVICode, in 2010. A deal for 3D-sensing-technology firm Canesta is currently pending. Microsoft Kinect, a sensing technology compatible with its Xbox 360 gaming console, sold one million units in the first 10 days of availability.

Bullish Scenario: Stifel Financial expects Microsoft's stock to rise 54% to $40.

Bearish Scenario: FBR Capital Markets predicts the stock will climb 8% to $28.

4. Dell ( DELL) is the world's third-largest supplier of personal computers. Its focus on the consumer segment hurt its financial performance during the Great Recession. Dell's revenue has stagnated since 2007 and its net income has dropped 18% annually, on average. Dell's earnings per share decreased by 14% a year, on average, during that span.

Quarter: Dell's third-quarter net profit more than doubled to $822 million, or 42 cents a share, as revenue jumped 19% to $15 billion. Dell blew past analysts' consensus adjusted earnings target by 39%, but it missed on the top-line by 2.2%. The non-GAAP operating margin rose from 5.7% to 7.6%. Though consumer revenue dropped 4%, every other unit posted double-digit percentage gains. Europe, Middle East and Africa revenue rose 15%. China and Japan sales climbed 29%. Large enterprise sales gained 27%. Small and medium business sales rose 24%.

Valuation: Dell's stock trades at a trailing earnings multiple of 17, a forward earnings multiple of 9.2, a sales multiple of 0.5 and a cash flow multiple of 7.2, 19%, 39%, 85% and 43% discounts to computer and peripheral peer averages. Its PEG ratio of 0.2 reflects an 80% discount to estimated fair value. Of researchers following Dell, 18 advocate purchasing its shares, 18 advise holding and two recommend selling them. A median target of $15.30 suggests a 12-month return of 11%. Dell popped 2.9% yesterday. Still, the stock has dropped 4.3% year-to-date.

Catalyst: Dell has $14 billion of cash on hand for inorganic growth. However, it does not pay quarterly dividends, so share buybacks appear to be more likely. Dell lost a bidding war for 3PAR to Hewlett-Packard ( HPQ) this fall. It is nevertheless eager to expand software, service and cloud offerings. It has completed four acquisitions, for Exanet, KACE Networks, Ocarina Networks and Scalent Systems, in 2010. A deal for cloud-computing software-as-a-service company Boomi was announced Nov. 2 and is pending.

Bullish Scenario: Deutsche Bank forecasts that Dell's stock will advance 46% to $20.

Bearish Scenario: Barclays values Dell's stock at $14, implying it is just below fair value.

3. Lexmark ( LXK) sells laser and inkjet printers and multi-function devices and related products such as ink cartridges. Lexmark's net sales have decreased 6% annually, on average, since 2007, but its earnings per share rose by 9% a year, on average, over that span and its stock delivered marginally positive gains.

Quarter: Lexmark's third-quarter profit multiplied to $72 million, or 90 cents a share, from $10 million, or 13 cents, in the year-ago quarter. Revenue climbed 7%. Lexmark beat the consensus earnings target by 12%, but missed the top-line estimate by 2.5%, sending its stock down 20%. The gross margin extended from 39% to 41% and the operating margin stretched from 7.8% to 11%. Lexmark held $1.1 billion of cash and equivalents and $649 million of debt at the end of the quarter, converting to a quick ratio of 1.3 and a debt-to-equity ratio of 0.5.

Valuation: Lexmark's stock sells for a trailing earnings multiple of 9.2, a forward earnings multiple of 8, a book value multiple of 2.2, a sales multiple of 0.7 and a cash flow multiple of 4.6, 56%, 47%, 51%, 78% and 64% discounts to computer and peripheral peer averages. Its PEG ratio of 0.1 reflects a 90% discount to estimated fair value. Of analysts follow Lexmark, five advise clients to purchase shares, five recommend holding and three say to sell them. A median target of $42 implies 14% of upside in the next 12 months. Lexmark has gained 42% so far in 2010.

Catalyst: Lexmark has $470 million of net cash on its balance sheet. It recently purchased Perceptive Software, an enterprise content management company. Investors dumped Lexmark's stock following its quarterly report on news that CEO Paul Curlander will retire this spring and inventory grew at a record pace for the third quarter. Still, pessimism creates opportunity and Lexmark's valuation makes it a compelling equity in the technology space.

Bullish Scenario: Citigroup expects Lexmark's stock to appreciate 49% to $55.

Bearish Scenario: Deutsche Bank values Lexmark at $37, suggesting it is fairly valued.

2. Hewlett-Packard ( HPQ) is the world's biggest maker of PCs. Its Services segment offers consulting and outsourcing services to businesses worldwide. HP's net sales have increased 7.1% annually, on average, since 2007 and its net income has grown by 8.3% a year over that span. Its stock, however, has suffered annualized losses of 6.9%.

Quarter: HP's third-quarter net income increased 6.1% to $1.8 billion and earnings per share gained 8.7% to 75 cents, boosted by a smaller share count. Revenue expanded 11% to $31 billion. HP exceeded analysts' consensus earnings target by 0.2% and their consensus sales target by 1.4%. The quarterly gross margin remained steady at 27%, but the operating margin extended from 9.6% to 9.9%. HP has a sturdy balance sheet, with $15 billion of cash and $20 billion of debt, equaling a quick ratio of 0.7 and a debt-to-equity ratio of 0.5. Cash rose 8% year-over-year.

Valuation: HP's stock trades at a trailing earnings multiple of 11, a forward earnings multiple of 8, a book value multiple of 2.2, a sales multiple of 0.8 and a cash flow multiple of 7.7, 45%, 47%, 51%, 75% and 39% discounts to computer and peripheral peer averages. Its PEG ratio of 0.3 demonstrates a 70% discount to estimated fair value. Of researchers evaluating HP, 28, or 74%, advocate purchasing its stock, 10 recommend holding and one advises selling. A median target of $53.44 suggests a 12-month return of 28%. HP has fallen 19% in 2010, lagging major indices.

Catalyst: HP purchased cloud-computing specialist 3PAR on Sept. 27 for $1.2 billion. It then bought cyber-security company ArcSight on Oct. 21. It has completed seven other deals in 2010, including a purchase of 3Com, Fortify Software, Stratavia, Palm and Motionbox, as well as the Linux operating system and HyperSpace assets from Phoenix Technologies. HP is an aggressive acquirer and is likely to continue its acquisition binge in 2011.

Bullish Scenario: Citigroup forecasts that HP's stock will rise 56% to $65.

Bearish Scenario: Deutsche Bank expects HP's stock to climb 8% to $45.

1. Corning ( GLW) makes specialty glass and ceramics with technology applications, namely glass substrates for liquid-crystal design television and computer displays. Since 2007, Corning's sales have risen 4.3% annually, on average, and earnings per share have grown 17% a year. Though, Corning's stock fell 9.3% a year, on average.

Quarter: Corning's third-quarter profit increased 22% to $785 million, or 50 cents a share, as revenue expanded 8.3% to $1.6 billion. Corning missed analysts' consensus earnings target by 3.2% and their top-line estimate by 0.7%. Still, its stock responded favorably to the release, gaining 1.2% around the announcement. The quarterly gross margin stretched from 56% to 58% and the operating margin extended from 16% to 20%. Corning has $5 billion of cash and $2.4 billion of debt, converting to a quick ratio of 3.5 and a debt-to-equity ratio of 0.1.

Valuation: Corning's stock sells for a trailing earnings multiple of 8.4, a forward earnings multiple of 8.9, a book value multiple of 1.5 and a cash flow multiple of 10, 52%, 32%, 25% and 21% discounts to electronic equipment industry averages. Its PEG ratio of 0.1 reflects a 90% discount to estimated fair value. Of analysts following Corning, 16, or 67%, advise clients to purchase its shares, seven recommend holding and one advocates selling them. A median target of $22.29 implies a 12-month return of 26%. Corning has fallen 8.2% this year, trailing major indices.

Catalyst: Corning has $2.6 billion of net cash, enough for a sizable acquisition. Its business has significant momentum, with trailing 12-month revenue up 29% and net income up 115%. Sentiment is turning for Corning. In the latest quarter, 13 of its 20 largest shareholders purchased additional shares as one held steady and six trimmed holdings. Given Corning's expertise, competitive position and economic moat, it's notably undervalued.

Bullish Scenario: Stifel Financial predicts that Corning's stock will climb 52% to $27.

Bearish Scenario: JPMorgan values Corning at $17.50, implying it is marginally overvalued.

-- Written by Jake Lynch in Boston.

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