Comments from Briefing.com
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IOMEGA CORP. (IOMG) 22 3/8 -7/8. The storage industry is expected to experience dynamic
growth over the next few years. As the PC industry replaces the 1.44 MB floppies with high
capacity removable disk drives, IOMG is expected to benefit from transition as company is well
positioned to take advantage of popularity of its Zip and Jaz drives.
produces and markets removable disk storage devices designed
to increase the storage capacity of personal computers and workstations. Its three main
products are the Zip, Jazz and Ditto drives. The emergence and widespread acceptance of the Zip
drive in 1995 triggered a remarkable jump in revenues for the 15 year old company. In 1994,
revenues totalled $141mln. By 1997, the company is expected to enjoy revenues of over $1bln.
The explosive growth in revenues has sparked a similarly impressive growth in earnings, with FY97
earnings estimated at $1.00 per share - a meteoric rise from FY95 results of $0.07 per share.
Industry Outlook
The removable storage industry is likely to exhibit dynamic growth over the next few years, as
new software applications and operating systems demand more and more storage capacity.
The removability of the drives is important in that it enables users to easily transport data, share files
and backup hard drives. Given the increased appetite for storage capacity, look for the PC
industry to gradually replace the existing 1.44MB floppies with high-capacity removable
storage drives. As a leader in the industry with developing relationships with the major OEMs and a
diversified product line, Iomega is well positioned to capitalize on just such a transition.
Product Profiles
Zip Drive: Targeted at the mass market, the Zip drive was a breakthrough product for the
PC industry in that it enabled computer users to dramatically increase their storage
capacity for a reasonable price. While floppies provide 1.44 MB of storage, Iomega's Zip
drives use interchangeable Zip disks providing 100MB of capacity. While the drive sells for
approximately $199, the disks sell for about $15. The product enjoys strong brand
recognition and an impressive retail presence.
Jazz Drive: Designed to support multimedia applications, hard drive upgrades and data
management, the 1GB removable cartridge is targeted at the power user market. Jazz
drives are available both internally and externally for prices ranging from about $499 to $599.
Ditto Drive: With a range of capacities from 420MB to 3.2GB, Ditto tape drives and cartridges
provide both low-end and high-end users with dependable backup to hard drives.
Attractively priced, the Ditto tape drives have enabled Iomega to increase its share of the
low-end market over the past few quarters.
Valuation
Iomega's stock has experienced incredible volatility since the beginning of the year, rallying
from a low of about 6 in January to a high in May of 55 back to 12 in August and now up to the
23 area. Clearly investing in Iomega is not for the faint of heart. While recognizing that the price
risk will depress the company's multiples, we think Iomega is in intriguing play for risk-tolerant,
growth oriented investors as the stock trades at roughly 23x estimated FY97 earnings
estimates of $1.00. The current multiple represents a sizeable discount to the company's projected 3
year annualized growth rate of 30%-35%. As the market tone in the technology sector continues to
improve, look for Iomega to trade up to 90%-100% of its growth rate. This would position the
stock for a move back to the low to mid 30's. A move back top these levels will force additional
short-covering (the stock is among the most heavily shorted stocks on the Nasdaq), which, in
conjunction with a promising outlook for FY98, could propel the stock as high as the mid-40s over
the next 24-months.
Risks
Increased competition: Iomega's success in the removable storage industry has brought new
players to the group. Most notably a joint effort by 3M, Compaq and MKE. However, Iomega's
lower cost structure should enable it to successfully compete on price. The added competition
will place greater emphasis on Iomega's ability to develop relationships with large OEMs.
Capacity constraints
Changing technologies
Corporate infrastructure:Transformation from relatively small company to billion dollar
operation will test management skills/structure
Margin erosion
Conclusion
Though the stock has rebounded sharply off its August low, we believe strong
revenue/earnings growth over the next several years due to widespread acceptance of the
company's removable storage devices will drive the stock higher over the next 12- to
24-months. Based on FY97 earnings estimates of $1.00 per share and the improved tone in the
technology sector overall, we expect the stock to test the low to mid-30 area over the next 9- to
12-months. Our secondary target is in the mid-40s. However, due to price and earnings instability
Iomega is an investment candidate for the most risk-tolerant, aggressive growth investors. |
