“What Makes Hot Air Fly?” (Update #1, for the SCON report.)
You’ve Been SCONed! A Report on Superconductor Technologies
(Note: The overview at the start remains unchanged, the updated details are below)
Message 13994838
In the MOMOmama (momentum) stocks of the new millennium, few stocks have had the incredible run-ups in valuation that Superconductor Technologies Inc. (NASDAQ: SCON) has had. This report will attempt to understand how the price how that run-up occurred and the underlying fundamentals that comprise the company. What we found should have surprised us, but alas, the dynamics that make SCON are common in the high flying Bubbles that make up today’s Market.
What we found about SCON
1. SCON seems to be asking the now common question of most anemic companies… “If we build a nice web-site will you still look at our fundamentals?” The fundamentals of SCON are terrible.
2. It just ain’t happening. We are better damn it!!!!! That’s what’s Sony’s more costly BetaMax said. SCON marginal performance with far greater cash out lay does, not seem to be garnering the MASSIVE market adoption “expected” and needed to justify SCONs incredibly rich Market Capitalization.
3. Market adoption. Though SCON has put our PRs for years talking about “Testing” with 9 of the TOP 10 cellular providers, the orders are simply not coming in. If the tests, and product placement within the ranks of its competitors was compelling for these industry Cellular Giants…then so would the Sales Orders for Product…is the common sense view. With the exception of US Cellular (the next Item for this customer) the industry is NOT ADOPTING. The industry according to SCON did its testing 2 years ago in 1998.
4. The “SPECIAL” deal that US Cellular was able to get to buy the SCONs filters is very very profitable. Problem is that it’s profitable for US Cellular and not SCON. Commercial revenue in the last reported quarter was $1,020,000, but the discounts/costs to US Cellular totaled $925,000 (warrant vesting & charges). So that leaves $95K coming into the company BEFORE any operating and manufacturing costs. That’s a giving a single customer a 91% discount against the ENTIRE commercial product Sales. Isn’t that SPECIAL?
5. Beware of the Cup and Handle. Posters on the Boards proclaim the stock will go up a new reason. The cheer lead the chart looks wonderful, and the stock will go up, but seldom can they explain why.
6. The Marketing and Sales Department spawns news of itself. The latest news to give SCON on a price boost was the reorganization of the marketing department to address the huge needs. That was this month…but for those of you paying attention, it nearly the same message to Investors on January 13, 1998 too.
7. The insiders and the all those Shares? Somehow, two Insider SCON officers just put in Initial Holdings Statements for a combined 12.9M shares, between the two of them. But float is 15M and 17.4 Outstanding. Huh? What the? TheTruthseeker is even scratching his head on this one.
8. Minuscule capacity: Here is where the Truthseeker’s vast Manufacturing experience comes into play. None of the analysts are even looking at this. SCON spent quite some time and serious effort to expand its manufacturing capacity in 1998. The launch of a new 18,000 sqft facility. Many of the processes are in house, without ability of others suppliers to come in and support the Demand needs (if they were to present themselves.) Superconductors are after all, quite a specialized process. The stated capacity of this “new” facility is 1 unit per day, with hopes of going to 3 units per day by start of 99. Assuming they were able to optimize the factory floor, they can produce about 1000 filters per year, the Sales prices of a single filter is about $20,000 each. That is a total capacity of $20,000,000 of Sales per year. Without additional capacity in this highly specialized Superconductor arena, TheTruthseeker believes that this will be a limiting factor with regards to any potential Sales.
Simply said, it appears SCON does not have near the plant capacity required to make the Sales projections.
The numbers needed to justify the incredibly high market Capitalization in SCON are based on wildly optimistic projections. But if SCON does not have the Manufacturing ability to make more than 20M dollars of Sales per year, as the available data from the PRs and SEC documents would imply, well then, it would mean that SCON is physically unable to produce the amount of product they are in the Projections. THIS IS NOT A DOT COM WONDER WORLD! It WIDGETS! And if you cannot make them, you cannot sell them.
TheTruthseeker will be updating this report shortly.
Caveat Emptor, and if you cannot do that, remember the Truth is out there, but sometimes you have to Seek it out.
The Truthseeker.
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Update 1:
As you can see from the above...the fundamentals and the real aspects of the SCON would can hardly make reasonable justification for its current Market Capitalization. But this is the age of individual traders, who jump on momentum stocks and attempt to ride the self-prophesizing wave. True, price set by what the market will bear, nevertheless stocks like SCON tend to run in a wave of popular feelings, only to fall back, to finally rest on the true merits of the company. In 8 months time, these stocks are obscure references that make anyone reading the chart wonder how people could have ever bought shares at those level.
In this way SCON is nothing new. By the standards set by the tulipmania Internet stocks, SCON has some value, however, profitability and long term viability remain very much in question. So lets dive into the details of SCON so to better understand “what makes hot air fly?”
#1 Fundimentiali Silli Puddius:
The fundamentals of SCON are terrible, and in no way support the current values put on them by private investors. (True enough the overwhelming amounts of trades in SCON are by individual investors)
Market Capitalization $632.5M Shares Outstanding 17.4M Float 15.0M
Book Value (mrq*) $0.96 Earnings (ttm) -$1.69 Earnings (mrq) -$0.47 Sales (ttm) $0.84 Cash (mrq*) $0.52
Sales (ttm) $7.30M EBITDA (ttm*) -$10.2M Income to common (ttm) -$14.8M
Profit Margin N/A Operating Margin N/A Return on Assets (ttm) -83.03% Return on Equity N/A
Current Ratio (mrq*) 4.46 Debt/Equity (mrq*) 0.06 Total Cash (mrq) $8.93M
**********
------------------------SCON..........Industry.........S&P 500.......SCON 5Yr Average
Price/Earnings.........NMF.............46.9................36.1.....................NULL
Price/Book................40.5.............11.6..................8.3.....................NULL
Price/Sales................92.5...............4.4..................3.5......................3.7
Price/Cash Flow.......NULL..........23.5................28.2.....................NULL
From the above SCON’s Price/Book is 349% greater than its industry. And its Price/Sales is a whooping 2100% greater than its industry.
SCON is covered by a single analyst and he maintains a wishfully optimistic stance on SCON. (footnote A) “The analyst rates the SCON a speculative buy with a target price of $100, which is more than 600 percent above a recent price of $13.75. He's forecasting losses of $0.77 per share this year and $0.24 per share next year, but predicts that the company will turn profitable in 2002 with $0.30 per share in earnings on $40 million in revenue.” After the analyst spoke with a reporter at Red Herring and the news came out this same analyst was feeling even more positive. So he upped his estimate by a measly 50%, giving a new $150 price target. Perhaps it was the excitement of seeing his name published.
Let’s take his numbers and do some calculations:
$150 multiplied by 17.5 Million shares means the analyst’s target MarketCap is
2.625 Billion dollars. (Yes Billion with a B) That would make the Market Capitalization of SCON 65.6 Times its Sales. To give that some perspective, QCOM a highly prized front page wonderStock, is currently given a Market Cap of 11.41 times its Sales. Qualcomm (Footnote B) also has a profitable and proven business model with profits in excess of ½ billion dollars.
Taking a very generous multiple Qualcomm using the analysts same numbers would give a stock price target of 26 dollars. {( 40M Sales X 11.41) / (17.5M outstanding)}
TheTruthseeker must wonder if this analyst peered up to the sky and pluck out a target number out very thin air.
Can it get any more Tulipmania? Why Yes.....Yes it can!
DATELINE JUNE 1 in the YEAR TWO THOUSAND a prophetic announcement is made by SCON----as follows-----Company president and CEO M. Peter Thomas confirmed that Superconductor Technologies (STI) emerged as the industry leader in the first quarter of 2000, with a seventy-nine percent share of superconducting product sales to wireless phone service providers. (footnote C)
Amazing, wonderful, can I say WOW! 79% of the ENTIRE MARKET. This must make SCON the dominant company for which all others should cower and quiver by it awesome market dominating power. Right?
WRONG
Sales to that business segment were $1,020,000 Divide that 79% and you get the ENTIRE MARKET for Q1 as being $1,291,139. Did I mention the current market cap is 650 Million?
Lets give SCON a 25% growth rate per quarter....hey lets compound it each and ever quarter too, so every quarter is 27% greater than the pervious. 2000 would then be $5,942,468 for all of 2000. Which means they would sell about 300 filters. The company for all its years in business has currently sold 273 filters. Think they are on track for this hyper growth?
Why do I say 27% compounding growth per quarter, why is that the number? Did I just pull it out of the Air?? NO. To get to the 40 Million sales Target given by the “analyst” SCON will need to grow 27% every quarter.
The basic numbers behind the company are incredibly weak. So why the great promise of rainbow Gold?
Perhaps it’s the great projections put forth on the investor relations page at the SCON site? As investors this is very exciting, Whooo-hoooo. It says this: (footnote E)
“The wireless communications market is huge and growing on a global scale. Many developing countries are using wireless technology as an alternative to hard-wired systems that are becoming capacity and quality constrained. In major US and European cities, traditional cellular systems are running out of capacity and moving towards digital. A recent study by Northern Business Information estimates that the total market for both conventional and superconducting filters for cellular and PCS base stations will reach $780 million by the year 2002. The superconducting portion (non-conventional) of the market is projected to be more than $550 million per year by 2002.”
Cool now it 550M, 79% of that is 435M divided by 20K per filter, and you got sales of a wondrous 21,750 units per year, but wait, how many can SCON built now. 1000 per year. OH SHOOT, we have all these sales but now we can not make them, darn it would have be spectacular. But wait, perhaps SCON is being aggressive, even the analyst with a $150 price, believes that sales would be 40M, and given the 79% market share for SCON the entire whole universal market would then be whatttttt........50.6 Million. (Maybe the analyst slipped a digit.....it could happen)
Bottomline, look at the numbers for SCON (on any measure), they are out of this world, the fundamentals, and current ratios are out of bounds, the stock has moved on Tulipmania, where everyone with a cell phone is now a cell phone analyst determining the number of crygenically cool superconducting filters will be deployed per base station. These are the same guys who drive 10 miles with the oil light on in the car, and blow up there engines, but today, they are Telco infrastructure experts. Woo-hoooo
But wait, SCON is having the rapid market adoption and industry usage to support this flight of fancy. Wrong-a-mungo!
Dateline of the Sputtering stop-starts
1. March 31, 1998 TOP companies----Testing
SUPERCONDUCTOR TECHNOLOGIES ANNOUNCES PLANNED FIELD TRIALS WITH MORE THAN 20 WIRELESS CARRIERS
New Orders for SuperFilter® System also Announced
SANTA BARBARA, Calif.--March 31, 1998--Superconductor Technologies Inc. (NASDAQ: SCON), a leader in the development of wireless communications filter products utilizing superconducting materials and cryogenic technologies, today announced that it has scheduled field trials of its SuperFilter® system with more than 20 different wireless carriers, which include eight of the top ten cellular service providers in the US. These trials will be conducted at more than 25 cellsites during the next four months.
suptech.com
2. April 28, 1998 Gonna be big!!!!!
Mr. Thomas added, "The SuperFilter® system is currently undergoing field trials in several cellular networks. During one recent demonstration calling traffic increased by more than 70 percent, the percentage of dropped calls were reduced significantly and the base station operated to its full capacity for the first time ever. These results equate to increased revenues for the service provider. Results such as these demonstrate the benefits of the SuperFilter® system, and we look forward to our customer base continuing to grow."
suptech.com
3. JUNE 29, 1998 We got an order......WE GOT an ORDER!
Today announced that it has received an order for 16 SuperFilter® Systems from a cellular service provider. M. Peter Thomas, President and Chief Executive Officer, stated: "We believe that this is the largest single order for superconductor-based wireless communications products in the history of the industry. Our ability to secure this groundbreaking order is ample testimony to the exceptional capabilities and performance of our SuperFilter® Systems in demanding cellular network environments
----Everyone who tested is ordering more TOO......wooo-hoooo!
14 trials were conducted with 12 cellular service providers.................. As a result of these successful field trials, STI has received follow-on deployment orders and requests for additional field trials from new and returning customers.
suptech.com
4. SEPTEMBER 15, 1998 Imagine this now....1999 is going to Rock&Roll baby!!!
In 1998, STI has been conducting or is scheduled to conduct field trials of the SuperFilter® System with more than 20 cellular service providers, including nine of the top 10 in the US. These comprehensive trials included recently completed in-field tests with this Service Provider. STI's SuperFilter® System has performed as expected or better in all trials, improving call minutes of traffic by as much as 100 percent in some cases. As a result, STI has begun commercial deployment of SuperFilter® systems to some carriers.
suptech.com
5. Look at us, Look at us.........we ROCK!!!!
The strong pace of SuperFilter® Systems sales is indicative of the progress we are making in penetrating wireless markets, with a particular focus on building relationships with larger service providers. During the quarter, we received a letter of intent for a 200 SuperFilter® Systems Supply Agreement which will include a minimum of 50 systems. We believe this marks the beginning stage of larger scale deployment of our products into large wireless networks.
"We also achieved a key manufacturing benchmark by averaging production of one SuperFilter® System per day during the month of September, with a total manufacturing output for the quarter of 40 units. This is a major accomplishment for an organization that little over a year ago had only limited production capabilities. We continue to be highly confident that we will achieve our goal of reaching a manufacturing capacity of three systems a day by the end of the 1998 fourth quarter.
suptech.com
6. APRIL 12, 1999 Yah Baby its 1999 for SURE!
At several of our customers, there are indications that superconducting filters are being considered for widespread application in their networks. The typical adoption cycle of a new technology, such as our SuperFilter® Systems, is a complex and often lengthy process. We believe that industry growth will likely proceed at a variable pace. However, we expect that 1999 will be a year of growth in sales leading to profitability in early 2000 or sooner. If we are correct, then we believe that 1999 will become the year of the inflection point in the volume deployment of superconducting filter systems.
suptech.com
7. MAY 6, 1999
Still 99, reflect on inflect, and we will, ummmmmm MAKE PROFTS in 2000 too!
"As we have previously stated, we believe that the pace of market activity we experienced throughout 1998 and the first quarter of 1999 suggests that our SuperFilter System has entered the commercial phase of its development. The typical adoption cycle for a substantially new technology, such as is employed in our SuperFilter Systems, is a complex and often lengthy process. We believe that industry growth will likely proceed at a variable pace. However, we expect that 1999 will be a year of growth in sales leading to profitability in early 2000 or sooner.
suptech.com
8. August 4th 1999. CFO says “Beam me outta here!”
“In a separate development, the Company also announced that James G. Evans, Jr. has resigned as Chief Financial Officer to pursue other interests:
suptech.com
9. August 31, 1999
Good thing the CFO is gone, cause the big Idea today is If you Can not sell them, Give then AWAY!!!
Santa Barbara, CA – August 31, 1999 – Superconductor Technologies, Inc. (NASDAQ: SCON) ("STI"), a leader in the development of wireless communications filter products utilizing superconducting materials and cryogenic technologies, today announced that it has signed a five-year agreement with United States Cellular Corporation (AMEX: USM) ("U.S. Cellular").
Under the terms of the purchase agreement, U.S. Cellular will purchase a minimum of 500 SuperFilter® systems over the next five years, and anticipates purchasing a minimum of an additional 400 SuperFilter® systems over the following four years. As part of the agreement STI will issue U.S. Cellular a warrant, subject to vesting provisions, providing for the purchase of up to one million shares of STI common stock at a price of $4.00 per share. Under the terms of the warrant U.S. Cellular will be entitled to purchase, one share of STI common stock for every $25 worth of SuperFilter® system purchases made by U.S. Cellular.
Boiling this down, just a bit, you can see how in 1998 the field tests occured, the sales and adoption did not take place in 1999. After (or with it included) US Cellular begins to buy some filters from SCON, Ironically the sales of these filters to US Cellular actually will make cause SCON to record costs that exceed the Sales price of the filters, And with the current Stock price, at least on paper, make the filters free, with cash profit to as well.
That is all for this current chapter, but I will be back soon.
I would love to say that the factors involved are unique to SCON, they are not. When you see these "Bell Shaped" curves on all these charts, up you realize this is not unique. TheTruthseeker will be back to talk more about SCON, in order to better understand the dynamics that make the Stock Pump on Junk.
TheTruthseeker would not recommend SCON to either his mother, bother or sister, nor friends. TheTruthseeker continues to assert that the fundamentals of SCON do no support the weight of its current valuation.
This is TheTruthseeker signing off for now, reminding all his readers, the Pigeon Poop is bad, but watch out for the crap of a Flying Pig
TheTruthseeker
Footnotes:
A: redherring.com
B. biz.yahoo.com
C. biz.yahoo.com
D.
Q1 00 $1,020,000
Q2 00 $1,295,400
Q3 00 $1,645,158
Q4 00 $2,089,351
Q1 01 $2,653,475
Q2 01 $3,369,914
Q3 01 $4,279,790
Q4 01 $5,435,334
Q1 02 $6,902,874
Q2 02 $8,766,650
Q3 02 $11,133,645
Q4 02 $14,139,730
E. suptech.com
F. suptech.com |
