First time contributing to this discussion - hope I'm not repeating anything, but came across this, courtesy of MF:
"Ampex and Keepered Media-
And a word on Iomega's valuation.
Dec. 27, 1996 -- The Ampex folder has been a very active one on the Fool stock boards. Just about a year ago I evaluated the company and was not really excited. I found it to be a company with deep restructuring burdens, much of their earnings in royalties without a long term future, and a core market in digital tape systems which, while strong, is in a competitive market. Also, there was this keepered media technology which had been talked up by management for over a year, with no sign of a real commitment in the industry. Add cheer leading by Individual Investor and the story was one that was less than convincing to me.
I began to change my mind during the fall. Instead of reading about keepered media in the Ampex folder and company press releases, I saw mention in trade magazines. It was clear that the company was actively promoting the technology in the industry. Then it began to talk about specifics about evaluation by disk drive manufacturers. It still seemed like it could be self promotion, but it was concrete.
By the way, the specifics of keepered media are not that difficult to understand. A magnetic disk drive is a magnetic recording device, with tracks on disks read by read/write heads. The speed of the drive is determined by the rate at which the disk spins and how densely the information is packed into those tracks. Denser tracks means faster, higher capacity drives for a given form factor.
I've talked about magneto-resistive (MR) heads in the past. MR is a technology in which different techniques are used to write and read the magnetic signal on the disk. The more sensitive read head allows lower strength signals to be sensed, allowing increased density. Keepered media is another technique which modifies the disk so that the head can read smaller strength signals.
Even as industry exposure of keepered media grew, it seemed to me that investing in the company based on widespread adoption of Ampex's proprietary technique was a bit speculative. We knew nothing of the cost of the technique, its real world usefulness or its compatibility with MR heads. With the industry embarked on a transition to MR, it seemed that keepered could face more hurdles to adoption.
But as time has gone on, several pieces have fallen into place. As I said, Ampex was in the marketplace with the product. Then they announced that the technique could be used with MR heads. Now they have their first development agreement with a drive manufacturer, Maxtor. Now its entirely possible that Ampex will never see earnings from keepered media. But I think at this point, the possibility of earnings from it is great enough to warrant considering an investment.
But the real reason why Ampex is now attractive is that all of the speculation seems to now be depressing the price of the stock. There's an overall aversion in the market to speculation right now that has money managers avoiding story stocks like this. After the announcement by Maxtor, the stock did not move up strongly. Certainly the announcement was vague enough so that the absolute value of the company was not changed, but this was the news that the boosters were looking for. With short term investors selling on the news, there's been little movement.
The most compelling reason to invest is the current earnings. Estimated earnings for this year are at $0.36. That's a P/E of 28. Next year's earnings are estimated at $0.51, which would give the stock a P/E of 20. If so, the company's turnaround in its finances continues apace. The truth is I'd rather purchase a stock like this at a current P/E more like 15, which would be way down at $6 or so. With the possibility of a new earnings stream from keepered media, I don't think we'll see those levels soon.
I don't think I'll add Ampex to my own portfolio anytime soon. If speculators get real impatient we could see significantly lower prices for the stock. However, those earnings will limit the downside risk here.
The story also illustrates how avoiding speculative excess can enhance investment returns. Now, with adoption of keepered media a real possibility, the stock is cheaper than when it was hot. While you may miss the train every once in a while, sometimes all that steam is just from the engine warming up. Take your time and watch your step boarding.
And speaking of trains, that former runaway train, Iomega, seems to sitting on a siding, waiting for the market to notice it. Speculative excess has hurt the stock, but I think it's very attractive at current prices.
Look at Iomega just as we just looked at Ampex. The estimates for the year are $0.45, which give it a P/E of 40. Next year, earnings are estimated to be $0.83, a P/E of just 22. It seems to me that the market should be willing to give a company with this kind of revenue and earnings growth a P/E of at least 30. That gives you a relatively conservative price target of 24, a solid return. These kind of calculations were one reason I was willing to part with some of my shares last month for 24 1/2 to buy more Beating the Dow Stocks.
The downside in Iomega now is the possibility that earnings won't be met. In the last 6 months we've seen only reductions of estimates. I wouldn't be surprised to see Iomega beat that $0.45, but next year if computer makers are slow to add drives to their models an the electronics business continues to be slow, that $0.82 estimate might come down.
On the other hand, I think there's reason to believe that next year will be a very good year for the company. The sales this fall may be an upside surprise. In addition, Iomega marketing may have known what they were doing by fine tuning advertising. Matsushita may start to make drives, providing OEMs with lower priced drives that will spur disk sales. n.Hand products may show up at Spring Comdex, generating excitement about future revenue streams.
Overall then, I see Iomega at current prices to be an attractive investment. There's certainly plenty of risk here, but the potential return over the next 12 to 18 months is substantial. Enough that I feel comfortable leaving a large part of my portfolio invested in the company."
Also, last night on Nightly Business Review, Paul Kangas' guest market monitor, Bob Brinker, editor and publisher of a newsletter, had this to say:
"last time we talked about Ultratech Stepper (UTEK). Now, here's a company that has a near monopoly on a unique piece of equipment that is used for MR thin film head manufacture. And I think Ultratech Stepper which was 25 on my last visit . . it's 28 1/4. I think this stock will be in the 40's within a year."
Any comments on either of these two stories? I'm currently evaluating buying Ampex (neither story would make me rush out and buy). Thanks |
