Dolby Laboratories, Inc. (NYSE:DLB)

CAPS Rating: 4 out of 5

Dolby Laboratories develops and delivers innovative products and technologies that make the entertainment experience more realistic and immersive.

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Player Avatar TSIF (99.96) Submitted: 8/6/2011 4:06:57 PM : Outperform Start Price: $31.00 DLB Score: +5.83

When the market is crashing and you are reporting earnings, then sometimes you get stabbed a few extra times with the skewer. Dolby Laboratories, Inc followed the markets the first part of the week, down about 10% going into earnings. When you factor in the other 18% on Friday after the earnings report and compare it to the peak in January, you're down over 50%. Since Dolby Labs has been a Motley Fool Stock Advisor pick three times sine it debuted in 2005 I guess I shouldn't be surprised to see the Motley Fool bashing that has started after the plunge. It seems some people just love it when they are eventually proven right and someone else is wrong.

In this case, it certainly pays to have a diversified portfolio as earnings data this cycle has resulted in a wave of very measurable price changes. I'm certain I can find 50 equities that have either gone up more than 10% or down more than 10% on earnings day this cycle. This certainly goes to show how reliable analysts and market pricing is.

That Dolby reported in a market crushing two day period definitely increased the number of lashes the market dispensed. It also meant that the interpretation of the reports was done much more hastily as focus was on the blood letting going on in the rest of the market. Dolby reported near in-line with a flat EPS of $0.55. Flat lately is apparently bad. The hasty part, however, may have been the interpretation that so far, Dolby Labs is not an automatic licensing shoe-in for Windows 8. While Window 7 revenue has been about 25% of Dolby's revenue and it's loss might warrant some lashes. The reality, however, is that:
1. This will not affect Dolby until at least 2013.
2. Dolby, if not included can still license it's products to the PC makers, such as Dell, HP etc.
3. Dolby's PC sales are a fraction of it's total placement which is growing.

When you measure Dolby's cash flow and earnings they have shown solid growth EVEN during the 2008-2009 recession. (Over 15% increase between 2009 and 2010) and 31% profit margins the last year. (The flat EPS was partially due to accounting changes between 2010 and 2011). Factor in the $7 per share cash, no debt, the solid cash flow, and the stock buybacks, (just renewed) and you have a company that is about as double dipped recession proof as you are going to find.

Now back, briefly, to the criticism of the Stock Advisor, (the flagship MF paid service) recommendations.
1. I think the sell off was overdone because their was no time to interpret the Microsoft Relationship.
2. The earnings came on a down day, accelerating the drop.
3. If you had bought Dolby when in 2005 you'd still, (after a 50% seven month drop), be kicking the S&P by about 30%. Certainly not as much fun as the 150% you might have been in January, but the ride is not over.
4. If you were diversified you probably wouldn't have felt the motion sickness quite as much.

Fortunately, for me, I can be a little upbeat as I didn't own Dolby before the selloff. I have this phobia about buying something that is doing well. I'm not sure if it's caused by:
1. The fear that I've already missed out and there isn't as much gain left for me.
2. I'm jealous of those who did invest.
3. I have this subconscious desire to hurt myself.

So what does that mean now? I don't know, if I did I'd be unsuccessfully running a hedge fund somewhere, (see 3 above). My meager trading/investing experience, especially in the crashes of Oct '08 to March '09 is that MANY of the equities that got hammered in the earlier rounds of the sell off were actually above their 2008 lows when the bottom settled in 2009. Those equities that got overly punished built their base and rode the waves. Name brand company's with strong earnings were quick to recover and exceed their previous levels.

Dolby was $42.61 Sept 15th 2008, $25.56 March 9, 2008, then $67 Jan 1st, 2011. It not only bounced back, it excelled, because all through the recession it continued to grow.

No anyone who looks at a company's past performance and things it's a reflection of the future isn't going to last very long in the investment world. Many company's don't innovate or get squeezed by newer technology or competition. Looking at past numbers are useful, but shouldn't be the basis of an investment decision.

IN the case of Dolby, however, there is nothing in the history that tells us that they are subject to a double dip recession anymore than anyone else. In actuality, they have proven they can ride through it. Dolby is an innovator and even in a recession there are some things consumers will stretch for. I thought in the last recession that auto makers and auto parts makers were in trouble. Was I wrong! It seems that when people lose their jobs they will give up their houses, but how many gave up thier cars or thier stereos? Look around...how many cars are in the drive way at Mom/Dad's where the kids moved in? How many in front of the three decker apartments where those foreclosed on moved into.

So, for me, it's a chance to get a piece of an innovator, solid cash producer, at a bargain price. If things don't go optimal for Windows 8 in the next two years I'll see if Dolby makes up for some of it with the PC makers. If not, I still have a cash machine buying back its shares. I fully believe that market selloffs have no mentality in choosing their victims; the market in these cases is extremely inefficient. The more I can leverage the inefficiencies the less risk I will have during further panic. If Dolby drops further in more market selling or more mis-interpretation of the reports then who am I going to blame?? No one, not even myself. I'm going to continue researching, evaluating and investing Dolby and other equities. I'll diversify. I certainly won't blame the Gardner brothers if I buy Dolby after doing my own DD, I don't see them forcing me to be so Foolish.

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Member Avatar ljmk33 (< 20) Submitted: 9/15/2011 9:16:32 PM
Recs: 0

Just how trashed does a stock price have to get before The Fool sells?
I think Mr. Dolby is paying them off to keep them on the buy list.
Also, if you want to be sitting on huge losses in another Fool favorite,
keep holding Netflix. The Fool would be wise to dump it today.

Member Avatar TSIF (99.96) Submitted: 9/16/2011 5:08:54 PM
Recs: 1

I don't know, you can try both of those questions on the SA boards where both are favorites. It doesn't appear that too many folks are "happy" about multiple favorites falling so soon after each other, but both are still up considerably over their first recommended prices. I think Netflix is in worse shape, but if you bought either at the peak, it's been a tough month.

I don't believe either are paying anyone off. They both had models that fit the SA principles. SA is particularly fond of the subscription model like Netflix and licensing such as Dolby. When they work, the margins are usually good and addional sales are usually at higher margins. Good luck.

Member Avatar ayaghsizian (97.65) Submitted: 10/1/2011 4:33:49 PM
Recs: 0

Just for fun I'll guess that it'll bottom at $18.91. Seems like at $27 bucks today no one thinks the company will ever grow. I think the bad news is priced in. When they start growing again or offer great guidance, the PE ratio will shoot right up again. Best of luck shareholders. If anyone wants to sell me their shares, I'll offer 20 bucks each. Please overreact.

Member Avatar Foliobuilder (31.91) Submitted: 10/18/2011 8:12:39 AM
Recs: 0

I sold Dolby in May after a 25% loss. Thought at the time it would shoot straight back up to 65 because I sold it at 50. Took it completely off my watch list at that time and lost track of it until I read some of your comments. Was real glad I sold after seeing the reaction to 2Q earnings on Aug 4th. Perhaps its time to get back in! It certainly would be a contrarian play at this point.

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