SRS Labs Must Spend to Compete

SRS Labs, Inc. (SRSL) develops and licenses audio technologies to OEMs in the home entertainment, portable media device, personal telecom, computing, automotive and broadcasting markets. The company develops technology for high growth markets that is licensed by leading OEMs.

December quarter results were short of consensus estimates on both the top and bottom lines. However, competition remains fierce, and we are apprehensive that the company may not be able to protect and market its IP. We are reiterating our Hold rating on SRSL shares. The shares are currently trading at an 11.1x multiple to our 2008 earnings estimates (P/E). The company plays in several very high growth industries, which could enable it to exhibit an attractive growth rate for the next several years. However, competing technologies continue to be developed, which could result in customer losses, as in the case of Sony Corporation (SNE) in 2007.

Although management is addressing this issue, SRSL's small size and relatively smaller resources could be a limitation to growth. Additionally, the risk of declining prices in consumer electronics is very real and should be considered in the purchase of the shares of SRS.

In order to offset pricing declines the company must continue to create new exciting technologies, which requires higher R&D spending. Despite the leading edge technology, we believe this exposes the investor to execution risk. We are reiterating our hold rating and price target of $8, which is a 17x multiple to our 2008 earnings estimates.

Pressures Continue at Electroglas

Electroglas, Inc. (EGLS) is an OEM of wafer prober and wafer test handling systems. February top and bottom-line results were in-line with consensus estimates. While the long-term outlook in probers for EGLS is positive, the short-term cash burn is concerning.

The firm recently signed new volume purchase agreements with Amkor Tech. Inc. (AMKR) and Broadcom Corporation (BRCM). Management has embarked on a new aggressive plan to lower breakeven to $14-$15 million (from $18-$19 million). We continue to rate shares of EGLS a Hold.

The shares are currently trading at a 0.85x multiple of our fiscal 2008 revenue estimate (P/S). The company delivered in-line results and provided guidance for solid bookings in the coming quarter. The company has launched a revamped product line, but significant sales growth is unproven. The product line transition has been slow.

Given the anticipated revenue level in the next quarter, the company is still below the breakeven point, and as such, the continued string of quarterly losses and cash burn (operating) will continue. We believe the stock will remain under pressure until significant orders of the new test handlers and upgrades are announced.

We believe shares are fully valued and expect them to trade in-line to slightly higher than the current valuation metrics. We are setting the price target at $2, which corresponds to a P/S multiple of 1.1x our fiscal 2008 estimate. From May 1, 2006 to June 16, 2006 the Semiconductor Sector index (SOXX) lost approximately 11.5% of its value. This was mainly due to investor worries about higher inflation and interest rates and their effect on financial securities.

In this same time frame, EGLS pre announced a weaker performance, and therefore, suffered a more substantial loss of approximately 34%. It has languished in this area for several months. While this is the type of drop that may indicate a buying opportunity we would prefer to wait until significant top-line growth and break-even is upon us. 

A Hold Rec on Bank of Ireland

We are maintaining our Hold on The Governor and Company of the Bank of Ireland (BOI, or Bank of Ireland) (IRE) and our $63 price target. In its third quarter trading update, BOI noted that earnings are being hurt by financial market volatility, with EPS expected to rise only 3-5% versus high single-digit growth expected previously.

BOI posted first-half (September 30) net earnings before nonrecurring items of 790 million, up 11% year-over-year. This reflected strong growth in net interest income and improved operating efficiency, partially offset by higher impairment charges. BOI management provided earnings guidance of high single-digit growth in underlying EPS for the year ending March 31, 2008.

BOI's Board of Directors recommended an interim dividend of 24.2 cents per share, up 15% from the prior-year interim dividend of 21 cents per share.