Tue Oct 31 07:56:46 2000
(FIRST CALL) GKMT: OPMR--Another Post-Qtr Sell-Off Provides Another Opport.-
GKMT: OPMR--Another Post-Qtr Sell-Off Provides Another Opport.--BUY
07:56am EST 31-Oct-00 Gerard Klauer Mattison & Co. (Ciccarelli, S. 212-885-401
Optimal Robotics+*# (OPMR)-Another Post-Qtr Sell-Off Provides Another Opport.--
BUY
Scot Ciccarelli, CFA
(212) 885-4017
sciccarelli@gkm.com
October 31, 2000
____________________________________________________________________________
Price: $30.50 52-Wk Rng:49.00-21.38 Price Target:$60 Russell 2000: 483
Shrs Out/Mk Cap: 13.6Mil/$415Mil 5 Yr Est Growth Rate: 50%
Div/Yield: -/- LTD/Cap: 0%
Avg Daily Vol: 140,363 ROE ('01E): 10%
Float: 11.1Mil EBITDA/Shr ('01E): $1.46
____________________________________________________________________________
FY Ends -- Fully Taxed EPS ^ --
Dec. Curr Prior P/E
99A~ $0.09 N.M.
00E 0.32 95.3x
01E 0.95 32.1x
02E 1.35 9.8x
____________________________________________________________________________
Qtrly -- 1Q -- -- 2Q -- -- 3Q -- -- 4Q --
EPS @^ Curr Prior Curr Prior Curr Prior Curr Prior
99A~ $(0.05) $0.04 $0.08 $(0.03)
00E 0.06A 0.11A 0.13A 0.02
01E 0.17 0.27 0.37 0.14
____________________________________________________________________________
+ Gerard Klauer Mattison & Co., Inc. is a market maker in the security of
this company and may have a long or short position.
* Within the past three years, Gerard Klauer Mattison & Co., Inc. was the
manager (co-manager) of a public offering of the securities of this company
and/or has performed other banking services for which it has received a fee.
# The Firm and/or its employees is also the owner of options and/or warrants
in the security.
@ Quarters may not total due to rounding;
^ Diluted EPS in US$ as per Canadian GAAP;
~ Excludes charges and gains and assumes full taxation; N.M. - Not meaningful.
o Another post-quarter sell off provides yet another buying opportunity.
Once again, OPMR shares have sold off markedly following a better-than-
expected earnings release. This marks the fourth consecutive quarter that the
stock has sold off after posting very solid financial results. We believe the
impetus for the sell-off is the higher inventory and receivable levels that
we have attempted to discuss in extensive detail in several recent First Call
notes, including our quarterly follow up on October 25. These exact same
issues were then highlighted by the Center for Financial Research and
Analysis (CFRA), a newsletter that tends to highlight potential negatives
regarding companies. In our opinion, the reasoning behind the higher
inventory and receivable levels are very easy to understand and extremely
logical upon further investigation into Optimal's business. As a result, we
would aggressively build positions in OPMR and believe the stock could
retrace recent losses by year-end, providing 30%+ appreciation potential over
the next several weeks. We continue to rate OPMR BUY with a 12-month price
target of $60.
o The CFRA report highlighted three main issues; the first was higher
inventory levels. Inventory reached $13.9 million in the quarter, composed of
$7.6 million of replacement parts, $3.5 million in finished U-Scan systems,
$2 million in parts and staging units and $0.76 million in systems in
transit. The company only started to break out its components in 2Q00,
because that was the first time the inventory levels became material. System
inventory declined by nearly 60% sequentially as total system inventory stood
at $8.2 million at the end of 2Q but only amounted to $3.5 million in 3Q. The
$2 million in parts and staging units relates to the company's facility in
Plattsburg, NY, which we recently visited and is needed for training purposes
and replacement part stocking. The $0.76 million in transit inventory
represented systems in transit or systems that had been installed but were
not recognized as revenue due to the company's stringent revenue recognition
policy. Thus, the biggest increase was in replacement parts, which grew from
$4.5 million in 2Q to $7.6 million in 3Q. We believe this build is needed to
service the company's growing installed base and is spread out among several
small sales and service facilities that the company maintains in the US. We
believe this segment of inventory will continue to grow as the installed base
of U-Scan grows. In light of these details, we do not view inventory as an
issue for Optimal Robotics.
o The second major issue highlighted by the CFRA report related to
receivable levels. Below we reiterate the major points we made regarding
receivables after the quarter in our October 25th piece - none of which have
changed in the last five days.
Receivables also increased as expected, due primarily to the sequential
ramping in the sales rate. Several investors questioned the receivables (once
again), which were up again sequentially and reached $21.6 million at the end
of the quarter, which caused calculated DSOs to rise to roughly 96 days. The
points that need to be made regarding the receivables are as follows:
1.The sales rate continues to ramp on a monthly basis. Just as we saw in
2Q, the sales rate continues to ramp on a monthly basis (system sales
increased by 26% sequentially). We believe this is indicative of the rapid
acceptance of U-Scan.
2.Slight extension of terms to a major customer, while negotiating for
2001 orders. In addition, it appears that the company extended some credit
terms by an extra 30 days to a major customer, upon that customer's request
(while the companies are in negotiations for next year's orders!) As we have
seen from the consumer electronic retailers we follow, smart retailers are
always seeking better terms and conditions and some retailers are able to
extend payables to reach their inventory levels so that they are not
expending any working capital. We believe this sort of negotiation becomes a
necessary part of the ongoing relationship. In fact, we believe it would be
difficult for the management to explain that they weren't able to secure
orders for next year since they wouldn't extend an extra 30 days of credit to
a major customer.
3.All receivables are of high quality. Importantly, however, we believe
all of the company's receivables are of high credit (they are with some of
the biggest retailers in the world). Further, the company has never had a
single payment default in its history.
4.The bills are being collected. In addition, we doubt that a single bill
is past 90 days.
5.There is no channel! Finally, receivables are often examined by
investors for both default potential as well as for signs that a company is
"stuffing the channel". If Optimal were simply selling a lot of widgets into
the channel, we too would have further questions. However, Optimal sells
everything direct and doesn't have a channel.
o Why extend terms to a major customer? The only incremental question we
have been asked regarding receivables is "Why would any of the company's
major customers ask for extended terms?" The simple answer, in our opinion,
is "Because they can". If a multibillion retailer can get slightly
better/extended payment terms from their IT vendors (including Optimal) as
well as from inventory vendors, it can add up to significant sums in the
aggregate. For example, based on Kroger's $2.9 billion in accounts payable at
the end of 2Q, we estimate they could generate an incremental $12 million in
interest income, assuming a 5% interest rate, if they were able to extract an
extra 30 days of credit from all of its vendors. Further, Best Buy has done
an absolutely tremendous job in its inventory management and is now at the
point where payables are roughly 100% of inventory. The implication is that
the company does not need to use its own working capital to fund inventory -
its vendors do it for them. They can then collect from their customers and
use those funds to pay the vendors. This is a major reason that Best Buy has
been able to boost their operating margins to an estimated 4.7% this year
from 2.2% just three years prior, when the payables to inventory ratio
approximated 60%. As a result, if one of Optimal's major customers asks for
an extra 30 days of credit as negotiations for 2001 orders are on-going, we
believe the logical thing to do is - give the extra 30 days.
o The last point made in the CFRA report related to negative operating
cash flow. Cash flow from operations is heavily influenced by changes in
working capital. As you fund higher inventory and receivable balances,
working capital usage increases, which causes negative operating cash flow.
In essence, the negative cash flow is simply a derivative of the inventory
and receivable changes.
INVESTMENT CONCLUSION
We were hoping to not have to go through this exercise yet again. However, we
recognize that the market is nervous in general these days and even the
slightest perceived negatives can have a significant adverse impact on a
stock price. Nevertheless, we believe the market has provided another
significant buying opportunity for investors. Despite the sell-off in OPMR
shares, the drivers of Optimal's business remain unchanged. Labor at the
retail level is still very tight, companies are seeking for ways to greater
utilize technology and automation and as companies become more revenue
challenged, they will increasingly look towards cost reductions (which U-Scan
provides in abundance) to generate earnings growth. Finally, we believe the
company will begin to announce orders for 2001 over the next several weeks.
Thus, with the stock growing in excess of 50% annually and trading at just
over 30 times our 2001 EPS estimate of $0.95, we continue to rate OPMR BUY.
ADDITIONAL INFORMATION ON SECURITIES MENTIONED HEREIN IS AVAILABLE UPON REQUEST
Although the information in this material has been obtained from sources that
Gerard Klauer Mattison & Co., Inc. (the Firm) believes to be reliable, we do
not guarantee its accuracy and such information may be incomplete or
condensed. All opinions and estimates herein constitute our judgment as of
this date and are subject to change without notice. This information is not
intended to be used as the primary basis of investment decisions, and because
of individual client objectives it should not be construed as advice designed
to meet the particular investment needs of any investor. This material is
for information purposes only and is not an offer or solicitation with
respect to the purchase or sale of any security. The Firm makes a market in
the securities of many of the companies mentioned in this material. From
time to time, the Firm and/or its directors, officers, employees, or members
of their immediate families may have a long or short position in the
securities mentioned herein and may, as principal or agent, buy or sell such
securities, or derivatives (including options) thereof. The Firm (or persons
related thereto) may from time to time perform investment banking or other
services for, or solicit investment banking business from, any of the
companies mentioned for a fee. For some of the companies mentioned, the Firm
has acted as a manager or co-manager of public securities offerings within
the past three years.
Valuation Guy/Obewon |
