I am long RGFX and am looking to purchase more shares tomorrow but I wanted to share some of my thoughts analyzing both sides of the equation for RGFX. Low PEG, high projected growth rate (30%+), undiscovered by the street yet are a few of the positives, however, with every positive, there is a negative. And with every negative comes another positive.
1) RGFX has failed to generate a positive cash flow from operations in 1995, 1996, and so far in 1997. They continue to eat into the cash generated from IPO to support operations.
Concentrating on 1997, the primary reason for lack of positive cash flow has been buildup in A/Rs and inventories as indicated in excerpt from 2Q97 10-Q below.
"Net cash used in operating activities during the first six months of fiscal 1997 was $5.3 million due primarily to increases in accounts receivable of $5.3 million and inventory of $3.9 million. Accounts receivable increased because of the high volume of shipments made towards the end of the quarter and extended payment terms granted to customers as the Company continues to expand its presence in international markets. Inventory levels, specifically consumables and finished goods, were increased to support the potential shift in product mix following the introduction of the PiezoPrintTM 1000 in December 1996 and the PiezoPrintTM 5000 in March 1997."
High volume of shipments towards end of Q2 - could be an indication of another revenue/earnings surprise for Q3. I'm not sure if this has been factored into analyst estimates for Q3. I haven't seen any upward revisions since release of Q2 results.
2) A/Rs and inventories have increased at a significantly higher rate than revenues in 1Q97 and 2Q97. Typically, this is a sign of future trouble.
Increase in inventories primarily due to raw materials and not work-in-progess or finished goods. A/Rs continue to expand due to RGFX's effort to launch an equipment leasing program. Problem here is that RGFX believes this will generate additional sales - this has not been proven yet. Again, high volume shipments towards end of 2Q97 could be an indication of more consumables being available at that time for the P5000 (RGFX stated lack of consumables available for P5000 early in quarter as reason for low P5000 sales). This should should translate to better results in Q3.
Any comments?
Regards,
Jeff |
