FOUR OUT OF FIVE

office computers can't run

Microsoft's

Two companies make most graphics processors for computers: Nvidia and ATI Technologies. We called both stocks "well worth a look" after Nvidia turned up on a March 2004 search for companies with low share prices relative to the spare cash they're generating. Last July ATI was bought by chip maker Advanced Micro Devices for $5.4 billion, about 40% more than the company went for at the time of our story. Nvidia shares have gained 172% since our story.

The stock might still be a bargain. It turned up recently on our Three-Point Value screen.

The strictest of our value screens, the Three Point search looks for companies with modest price/earnings, price/sales and price/cash-flow ratios. In doing so it seeks to eliminate companies that might look inexpensive for the wrong reasons based on just one of the measures. A low P/E ratio, for example, might mean that a company is benefiting from a temporary tax break. A low price/sales ratio could mean that a company has booked plenty of orders, even though it's having trouble collecting the cash for them. Companies for whom all three ratios are low might have bargain share prices relative to the amount of orders they're writing up, the cash they're collecting and the profits they're clearing.

Our screen also looks for manageable debt levels, projections for healthy profit growth and more. See the screen recipe for a full list of criteria and use our stock screener anytime to run the search for yourself. It recently produced eight survivors from a starting database of 8,000 companies.

Santa Clara, Calif.-based Nvidia doesn't actually make graphics processors. It handles the design and marketing and leaves the assembly to hired manufacturers. The company has an 88% share of the market for high-end graphics chips for desktop computers, according to analyst surveys of computer merchants. That's roughly a 10 percentage point gain since June. One reason for the gains is that Nvidia was first to introduce a graphics chip, its 8000 series, that's compatible with DirectX10, a programming standard used in Vista. The company plans to extend its 8000 series to include lower-priced models in coming months.

The company has also made gains in the laptop market. Jonathan Hartzler, an analyst with Independence, Ohio-based Longbow Research, says the company increased its laptop share by 20 percentage points to about 58% by the end of its fiscal 2007 (Jan. 28), and could reach 70% by the end of calendar 2007. Laptops will begin shipping with Vista once Intel introduces its next line of central processors, called Santa Rosa. That could spur demand for Nvidia's DirectX10-compatible notebook chips.

Nvidia also designs graphics chips for cellphones and videogame consoles. Its cellphone business is growing only modestly, mostly because it's tied to the sale of high-end phones, which many customers are passing on until media download speeds improve. Console sales should jump this year as Sony's PlayStation 3 becomes more available.

Last year the company turned a 29% improvement in sales into a 49% jump in earnings. This year sales are expected to increase 16% and earnings per share 14%. Shares trade presently at 17 times Nvidia's forecast earnings for the current fiscal year ending in January. That seems cheap. Divide the P/E by this year's growth forecast and you get a PEG ratio of 1.2. The S&P 500 trades at 15 times 2007 earnings and its underlying earnings are expected to increase just 7% this year. That makes for a ratio of 2.1. In other words, Nvidia seems more than 40% less expensive than the broad stock market relative to its earnings and near-term growth prospects.