Latest from Morningstar on WIND. Not encouraging:
We will be reducing our coverage level of Wind River within the next few weeks so that we may focus our efforts on other companies. Our last Thesis was written September 3, 2002.
Thesis
We remain convinced that Wind River has solid long-term prospects. But poor execution leaves us doubting whether the firm will ever reach its potential, and so we're staying on the sidelines.
Wind River kept up its string of disappointing performances during the July quarter, as sales fell 21% from a year ago. Losses continue to mount. The biggest problem is the company's heavy reliance on the struggling telecommunication industry, which has been forced to cut back spending significantly in the wake of dwindling profits.
Management has responded by cutting expenses, but Wind River remains far from profitability. While recent reductions should allow the firm to break even on quarterly revenue of $72-$75 million, without any meaningful sales growth on the horizon--particularly with the telecom sector sinking even deeper into the abyss--we think it's unlikely that Wind River will be profitable this year or next.
In our previous analysis, we said there was a lot to like about the company. So far more than 150 million products have been sold with Wind River's embedded operating system, powering devices like CiscocaseConvert('CSCO') CSCO routers and Eastman Kodak EK digital cameras. Wind River also controls 30% of the embedded market (software that powers devices but is invisible to the user). But the company's lack of execution continues to amaze us. Wind River has failed to deliver on its original targets in four of the past six quarters. This suggests that the firm is either lousy at execution or too optimistic.
The recent profit shortfall has hurt our confidence in Wind River; we've slashed the assumptions in our five-year discounted cash flow model, which admittedly may have been too rosy. We now expect sales to decline 25% this year, increase 10% next, and rise 15% thereafter (our previous estimates called for a 15% decline this year and 20% growth in the later years). We still expect margins to expand, the byproduct of greater economies of scale. Cost-cutting should also boost profits once IT spending improves. Under this scenario, Wind River is worth $5 per share, $2 below our previous fair value estimate.
With the stock trading near what we consider its intrinsic value, we'd pass. We still think the company has a bright future: Market share and sales should grow as personal computing expands into more sophisticated devices, like handheld computers and cell phones. But we'd steer clear of investment until spending in the communication industry picks up and revenue growth resumes.
Valuation
We are downgrading our coverage of Wind River. As a result, we will no longer publish a fair value estimate or star rating. |
