Novice Investing - Buying a Novel Story on Novell

Date: Thursday 07th 2008f August 2008 01:39:06 PM

Buying a Novel Story on Novell - 12/06/2006

By: Novice Investing Staff

We need to invest money in our stock portfolio model. Back in November 2006, we talked about several investment candidates which include Novell Inc. (NOVL). At the time, we were pondering a better entry point for Novell would be below $ 6 per share and the opportunity would be when it delivered bad earning report on December 5th 2006. What a coincidence. Novell posts an in-line earning of 6 cents per share during the fourth quarter ending on Oct 2006. However, revenue was at $ 244.9 Million, shy of analysts' expectation of $ 251.5 Million. Revenue for fiscal 2007 was expected to be in the range of $ 945 - 975 Million, lower than analysts' estimate as well.

So, why are we interested in adding Novell to our sample portfolio? First of all, Novell is rich, very rich in cash with $ 735 Million in positive net cash recently. While that figure is down from $ 1 Billion a year ago, it is still a solid $ 2.16 per share of positive net cash. Considering that the shares trade at sub $ 6.00 per share, this is a good enough cushion for investors. Secondly, Novell is posting a small profit before the Microsoft licensing deal and we expect Novell to boost its profit significantly due to cost cutting and the benefit of Microsoft's deal. How much, perhaps as much as 30 cents per share in fiscal year 2008 and 50 cents per share the year after. This fiscal 2006, Novell is earning 16 cents per share a year, hardly an inspiring thing for stockholders.

Perhaps, a pro-forma income statement of Novell would convince you. We had made predictions on Novell's net income for the next fiscal year. Click here for Novell's pro forma income statement. We predict Novell to start earning 45 cents per share in 2009 which gives it a fair value of $ 7.51 per share.

How does that number come up? Here is the calculation:
With current risk free interest rate of 4.46%, we need a yield of 7.46% for stocks (3% more than risk-free interest rate). Therefore, fair P/E value for our stock portfolio is 13.4. Novell's 45 cents per share profit in 2009 is equivalent to present value worth 40.8 cents. Throw in Novell's net cash of $ 2.17 per share, Novell's fair value is therefore:
Fair Value: (EPS X P/E) + positive net cash
Fair Value: ( $ 0.408 x 13.4) + $ 2.17 = $ 7.64 per share

At the moment, Novell is trading at $ 5.80 per share, which is 'only' 32% below fair value. Generally, to be included in our stock portfolio, the share has to be trading 50% below fair value. As we have told you briefly, we sometimes will make a purchase on company that is not 50% below fair value. Novell is such a case. We believe that despite that $ 7.64 per share fair value, Novell can rise more than that as is evidenced with the stock's recent high at $ 9.80. That is about 68% higher than it is now. We realize that this is more of a hopeful thinking as we cannot prove mathematically that Novell deserve a higher price than $ 7.64 per share fair value. However, time will tell if Novell is the right investment or not. We are therefore buying Novell at $ 5.80 per share.

END

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Novell Inc. (NOVL) or any other securities.

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