Modest Strength from Hercules
Hercules Technology Growth Capital Inc. (HTGC) is scheduled to report its 1Q08 financial results after market close on May 8, 2008, with a conference call scheduled later the same day. HTGC currently trades at 8.1x the consensus forward estimate (versus 9.2x at the time of our last report), a 16% discount to the peer group median (versus a 7% discount at that time).
Over time, we believe that HTGC's prospective cash yield will play a role in its share price. However, given HTGC's youth, small size and indeterminate performance, estimating its yield requires a fair bit of guesswork.
The shares currently yield 11% (based simply on annualizing its latest dividend), but we expect the dividend to increase over the next couple of years as HTGC grows its investment portfolio and re-leverages its balance sheet. The 11% yield currently is below its peer group median. Relative pricing looks attractive on a P/E-to-growth (PEG) basis, using the consensus long-term growth rate.
HTGC's PEG ratio is 0.54, a 50% discount (versus 35% discount previously) to the 1.08 median for the peer group. On a price-to-book basis also, the 6% discount looks attractive given an ROE of 17% above median (ROE-adjusted P/B is 24% below median).
Our six-month price target of $11.50 per share equates to 0.89x our estimated book value six months out (now June 2008), and 8.6x our FY2008 earnings estimate. We view the $0.30 quarterly dividend as secure (and likely to increase over the next couple of years), implying about 10.9% expected total return over the six-month period.
Given the current credit and liquidity concerns with the financials as a whole, we maintain our Hold rating on the shares. We are, therefore, maintaining our Hold recommendation on the shares with a six-month target price of $11.50 per share.
Buy MIPS Tech at Current Levels
MIPS Technologies, Inc. (MIPS) develops embedded processors and intellectual property for use in performance-oriented markets, such as digital entertainment, wired and wireless communications (including broadband access), office automation, security and automotive markets. December quarter top- and bottom-line results beat the consensus estimates. The valuation on MIPS has become very compelling as the stock has shed 55.8% from its 52-week high, and its new acquisition has the potential to drive margin expansion.
The firm just completed an acquisition of Chipidea Microelectronica, S.A. (Chipidea), a Portuguese company, for $147 million in cash. Chipidea has the potential to drive margins higher. The Chipidea product line enjoys higher margins than the legacy business and had a pro-forma operating profit of $1.7 million in the second quarter.
We would be buyers of the stock at these levels.
