I’ll give it a try.
One way to assess value is to compare it to similar companies. One such
company, AEIS, makes thin film deposition equipment. AFCO uses AEIS
power supplies in their products because it is the most critical
component. The former CFO of AEIS, Dick Beck, is the chairman of AFCO
and sits on the AEIS board.
PHTN makes equipment to monitor the quality of display products,
especially TFT screens. The CEO, Vince Sollitto, sits on the AFCO
board because he is familiar with the quality of the screens produced
using AFCO equipment. Although the technology produced by his
company is very different from AFCO technology, they sell into some
of the same markets. AFCO currently gets about 40% of revenue from
the display industry, and it was around 95% before the Unaxis LAC
purchase.
Here is a financial comparison:
Ticker Price Shares Market Cap Cash Sales 3 year EPS
AFCO 9.92 11m 109m 6.56 153m 1.66
AEIS 23.83 32m 763m 6.40 162m 1.49
PHTN 30.63 17m 521m 11.11 55m 0.33
The AFCO EPS excludes the effects of goodwill amortization. I think
this is fair because PHTN and AEIS also made acquisitions that they
didn’t amortize. AFCO was required to do so because they paid cash
for the LAC division of Unaxis.
A superficial look suggests that AFCO is relatively grossly
underpriced, but this is understating the case. AEIS has poor growth
prospects because they derive 70% of their revenue from the
semiconductor industry. PHTN has better prospects in the display
industry, but AFCO gets triple their revenues and benefits from
display industry growth. AFCO also has better prospects in the PET
bottle deposition industry, where the potential market size is
greater than all the other market segments served by AFCO.
There is controversy in this area. One analyst stated that he believes
AFCO’s partner and largest potential customer, Coca-Cola, is
investigating alternative technologies. Another analyst disagrees.
So what? Aren’t all tech companies overpriced, including AFCO, AEIS,
and PHTN? Well, I value them at 20x EPS + cash. Using this formula,
AFCO is worth 20 * (1.66 / 3) + 6.56 = $17.63, PHTN is worth
20 * (0.33 / 3) + 11.11 = $13.31, and AEIS is worth
20 * (1.49 / 3) + 6.40 = $16.33.
Most tech companies are even more overvalued than AEIS and PHTN, but
AFCO is a rare technology bargain. |
