You should always do your own research and ultimately you will decide for yourself, based on your risk tolerance, whether or not a particular investment is suitable for you. Combine that with what the analysts are predicting and what your broker is saying and you should find some sort of balance.
One thing to remember is that an out-of-favour stock 'never' has any large professional following and so the analysts won't be jumping out of their seats to recommend Corel as a buy. These analysts are going to stay clear of Corel until it can show earnings. Recall that they were all 'burned' last year, and so they won't be taking any chances unless the company starts producing earnings again.
But, a company with a current ratio of 2.6, positive cash flow, increasing cash reserves, and with long-term debt owed to a majority shareholder is not your typical public business that trades at a P/S of less than 1.
In response to some of your specific questions:
1. How is Corel going to go from 0-13% PM? Yes, the amortization gives you about 1/2 of that, but GM is probably stuck where it is because of the sales model. Are they going to cut SG&A? or R&D? The latter (at 16%) is relatively high, but also offers the greatest hope for the future
If you refer to the table in the first quarter report, you will find a table showing 'Income from Operations Excluding Aquisition-Related Charges'. Net Income without these charges is $12,943M or 13.8% PM.
On page 8 of Form 10-Q of the SEC filing for Q1-97, Cost of Sales is broken down:
Cost of goods sold --- $5,489
Licence amortization --- $14,583
Royalties --- $4,673
If amortization had been previously written-off, GM in Q1-97 would have been 89.2%. Hence the switch to US GAAP will improve GM going forward although not as high as 89.2 since this includes the licence revenue from ECG. Using 80% GM going forward should be reasonable for analysis.
Also from the SEC filing, Corel expects SG&A to remain steady as a percentage of sales during Q2. They expect R&D to to increase somewhat as a percentage of sales during Q2, although in the last conference call they said that R&D was not expecting any staff increases so $20M for Q2 may be the expense. Based on this and 20% for Advertising, I am using 60% for all of the expenses going forward.
2. I can't agree that a PE of 25 is "conservative"!! Look at SYMC (another company I am following); it is profitable, growing, and about the same size as COSFF. It has a forward PE of about 16
If the company switches to US GAAP in Q2-97, and reports $0.80/share for the quarters Q3-97, Q4-97, Q1-98, Q2-98, and with todays price of say US$6.00, the forward PE is 7.5
I used a conservative PE of 25 for the stock assuming a trading price of US$20 at the end of Q2-98 when trailing earnings would be $0.80/share.
3. Backing out the amortization gives you about 42c/share free cash flow (very rough); this suggests a fair price of about US$6 for COSFF (hmm; i'm assuming COSFF is 1:1 with COS - is this true?). Given how little of a premium this is over current price, I think analysts aren't expecting any margin improvement for next year or so. They may be right - R&D costs are 16% of revenue, which is certainly high (not outrageous however, and could be positive). There is also payment on LT Debt which I left out of above calculation
Your information appears dated.
Have a look at post 126 for a break down of operations. The repayment on LTD is $3.054M in Q1-97. Interesting to note on the LTD issue - Novell since taking an equity stake in Corel, has not sold a single share. If Corel was really in bad shape and had no future, why not take the 'dead' money and invest it elsewhere.
4. BALANCE SHEET -- Doesn't look so great right now after spending all that cash on WP acquisition
The balance sheet is improving. Cash is going up. A/R is going down. Current ratio is stable. Most of the spending has been done and was on technology upgrades (software licences and purchased software) and aquisitions for Office for Java.
Not bad for a company that after one year owns a product that can tap into a 5 billion a year market.
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