Company Spotlight - Dolby Labs (DLB-NYSE)

  I Can Hear Clearly Now

February 7, 2008 - Dolby Laboratories, Inc. (DLB-NYSE) is the market leader in developing sound processing and noise reduction systems for use in professional and consumer audio and video equipment. Though it does make some of its own products, Dolby mostly licenses its technology to other manufacturers.

The company went public in 2005 at $18 a share. It didn't do much until late in 2006 when it took off. It hasn't looked back. There are good reasons for the outstanding performance.

First and foremost, earnings escalated between 2006 and 2007, going from 80 cents a share to $1.26. While they're expected to be $1.35 this year, analsyts believe they'll improve on average 20.5% a year over the next 5 years. They think revenues will improve by 16% a year. For the fourth quarter of 2007 (fiscal year ends in September), revenues grew by 26% thanks to higher demand for its PC, consumer electronics, and broadcast products. Licensing revenues were up 29%, totalling $103 million. Product sales jumped by 32% to almost $20 million. Earnings were up by 77% from those improved sales and some help from a lower tax rate.

Other numbers: Market cap is $4.2 billion on 110.4 million shares. As mentioned above, Ray Dolby, the founder, owns 98% of the Class B shares which represent 63% of all shares. He controls about 93% of the company. What Ray wants, Ray gets. Return on Equity is 17%. Net profit margin is a very pleasant 29%. Current assets are almost 6 times current liabilities.

One other number: the Price to Earnings ratio is 35, more than 1.7 times the forecasted growth rate of 20%. That means investors already are head over heals in love with this stock. That means if there is any shortfall in earnings from the projected numbers, this stock will drop like a Paris Hilton CD. That's the one caveat about all this good news: it's already baked into the stock.

Future growth will come from PC and broadcast markets with increased demand for digital televisions in the U.S. The Home Theatre in a box market as well as AVR (audio visual recorders) and DVDs will add to Dolby's sales. Another market: gaming sytems that will upgrade components in the next cycle.

Dolby is a great stock. It's performed well in a difficult market because it delivered earnings. Watch out if it doesn't.

- Company Web site: www.dolby.com

- Ted Allrich