(WDC) Solid Technology Bets for the Long-Term – Investment Ideas

October 6th, 2009

Nearly 2 months ago, I wrote about technology stocks making a comeback, highlighting 3 companies that were poised to benefit from a surge in tech names over the long-term. The article was titled Are Techs Making a Comeback?

Since that article was written, and during the third quarter, the Nasdaq outperformed the Dow and S&P 500. The 3 stocks I picked have soared past the Nasdaq over both time periods.

Using the Research Wizard, I found Zacks #1 Rank (Strong Buy) plays that are poised to deliver strong results over the long-term. The companies are Western Digital Corp. (WDC), Perfect World Co., Ltd. (PWRD) and Syntel Inc. (SYNT), which is now a Zacks #3 Rank but earnings projections remain bullish. These plays are poised for even more upside from here. Therefore, I thought it would be worthwhile to revisit each pick, provide updates and go over some of the fundamentals that are indicating further outperformance.

3 Tech Plays

Western Digital Corp. (WDC) is seeing bullish estimate revisions. For the year ending June 2010, the Zacks Consensus Estimate of $3.50 per share jumped from last month’s $3.28. The forecast was at $3.04 in August’s article on WDC.

The hard drive maker continues to offers a low PEG ratio of 0.93. and an attractive forward P/E of 10. Its return on equity (ROE) of 19% compares to a negative industry average ROE. The company’s net profit margin of 6% is also standing high above a negative industry average result.

The company recently announced fourth-quarter results, delivering non-GAAP earnings of 76 cents per share. The result topped the Zacks Consensus Estimate by an impressive 181.5%.

Fourth-quarter revenue of $1.9 billion was 3% below the year-prior quarter. The company shipped 40 million hard drives during the quarter.

Management commented that in a challenging time for the worldwide economy and the hard drive industry, Western Digital maintained profitability and stayed cash flow positive throughout the fiscal year. John Coyne, president and chief executive officer, said during the quarter, the company responded promptly to capitalize on unexpected market upside in each of its markets to produce financial results that significantly exceeded expectations, and included a return to WD’s targeted gross margin and operating expense model parameters.

WDC shares outperformed the market by about 20% over the past quarter and by roughly 6% since the stock was featured in August’s article.

Perfect World Co., Ltd. (PWRD), a player in the burgeoning world of Chinese online gaming, beat the market by more than 40% during the third quarter. Since last written about in August, the stock is more than 15% ahead of the market.

Perfect World’s return on equity (ROE) of 51% towers over the industry average of 4%. The company’s stellar net profit margin of 49% compares to a negative industry average. PWRD also offers a solid forward P/E of 16 and PEG ratio of 0.52

The company saw second-quarter net income of $40.9 million, which was 22% above the previous quarter’s total and 69% ahead of the year-prior result. Total revenues jumped 56% year-over-year.

The company noted that strong results were primarily driven by better than anticipated performance of the newly launched 2.5D mysterious adventure MMORPG ‘Battle of the Immortals’ and increasingly optimistic results from a number of existing games. “We believe our fine-tuned strategy of allocating more resources to longer-term projects and larger expansion packs has really begun to show positive results,” said Mr. Michael Chi, Chairman and Chief Executive Officer.

Analysts polled by Zacks are calling for 2009 earnings $2.82 per share, up from $2.49 over the past 2 months.

For the following year, the Zacks Consensus Estimate of $3.36 was increased from $2.87 over the past 2 months.

Syntel Inc. (SYNT) has seen the full-year Zacks Consensus Estimate climb from $2.20 to $2.44 per share over the past 3 months. For 2010, the Zacks Consensus Estimate stands at $2.43, versus the 3 months-ago level of $2.11.

The technology services player has a return on equity (ROE) of 40%, more than tripling the industry-average of 13%. The company boasts a solid balance sheet, showing no debt. Its net profit margin of 25% is well above the industry average of 5%.

Syntel posted second-quarter earnings 61 cents per share, eclipsing the previous year’s 42 cents and exceeding the Zacks Consensus Estimate by 20%. Revenue slipped 3% year-over-year.

“Syntel was encouraged by improved stabilization in the marketplace and the increasingly positive discussions initiated with our clients during the quarter,” said Chief Executive Officer and President Keshav Murugesh. “While discretionary projects remain sidelined, customers are beginning to once again look at cost reduction initiatives which are aligned with their longer-term strategic objectives.”

Shares outpaced the market by about 30% over the past quarter and by approximately 12% since August.

Stock Screening Resources

Research Wizard – Use this sophisticated tool to screen for some of your own techs. Or, create new strategies and backtest them.

Zacks Custom Screener – Use this free tool to create your own screens.

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