To all. This is a copy of an Email I sent Carlton Lutts and the SEC this morning. I am sure we all hope that he will reply.
To: Carlton Lutts, I have taken the liberty of posting the sections of your Cabot Market Letters # 833 and #838 which discuss Presstek, together with my comments therein on the Silicon Investor thread entitled " Presstek.Stock of The Decade"( techstocks.com as well as with the SEC's Enforcement Division complaint section. I will first post pastings from your letters followed immediately by my rebuttal. I hereby challenge you to reply to my arguments in an open forum for a wide audience of your followers to judge for themselves.
#833
"Presstek's deep five-week RP line correction reflects the intense selloff in the stock over the past two weeks. Is the momentum still positive? Yes! Presstek is a profitable Heritage Stock for us, a stock we believe has super-growth potential. See the enclosed Stock of the Month Report for the latest facts. Presstek's second quarter earnings, due out around July 21, could hit $.17 a share. No stock split is planned as yet. If you haven't yet bought this stock, buy it today. If you own it and can average up, do so now."
Presstek's Q2 earnings at $0.10/share must have been disappointing to you. Even more perplexing is the manner in which they arrived at the number. Product sales were only up 5% from the previous quarter while Royalties and fees increased by 14%. The total increase of only 8% is a continuation of a trend which commenced in Q4 of 95 when the sequential growth in sales from the preceding Q dropped from 39% in Q3-95 over Q2, to 23%, to 17% and now 8%. This trend is likely to continue given the nature of the shipments of QM-DI kits. In light of the slowing growth in revenues how did the company even post the modest increase of $357,306(+28%) in net income and $0.02(+20%) in EPS? It must have been magic because the company somehow managed to reduce its COGS by $575,496 or 10.7%. Likewise engineering and product development expenses for this supposedly growing cutting edge technology company decreased by almost $650,000. On the other hand marketing, general and administrative expenses increased by a staggering 78% in one quarter. I wish you would share with us what your assumptions were in arriving at your $0.17/share estimate for Q2.
"STOCK OF THE MONTH
ONE PICTURE IS WORTH A THOUSAND WORDS - Presstek, Inc. - Presstek's
tremendous price advance over the past seven years shows a rise from 2 to 200. That incredible performance is the stock's way of shouting to the world that this small New Hampshire company does truly have a revolutionary printing system that's just beginning to replace the antiquated, pollution-laden systems printers have been using for decades. The present pullback in the stock is simply a severe correction in an ongoing super-growth stock story."
No I believe that the unprecedented run up in the stock did not reflect fundamentals, but rather a manipulation still being investigated by the SEC which you of course are personally aware of.
"The trouble is, most of the media doesn't believe it. None of the
reporters we have talked to have gotten up off their duffs and ventured into New Hampshire to see this revolutionary machine. If they did, they couldn't possibly write the nonsense they write. It's ironic, because these writers earn their living through the printed word, and yet they continue to attack this small firm that has made a quantum leap in improving the way those words are put on paper.
Over the past few months we hope you've been paying attention to the real facts issued by Presstek in its press releases, not the fiction put out by the media. In the fiction issued by the media note carefully that there is usually no reference to a source, because there is no authentic source. Here then is fact vs. fiction. (1) Fact: Heidelberg's production rate is scheduled to increase to 40 machines per month beginning in the second quarter of 1997. Thus, by the end of 1997, at least 650 Quickmaster DIs will have been produced. (Fiction: machines are in trouble and slow coming off the line.)"
Says who. As of this date there have only been two dozen installs world wide. Given that according to Presstek's own numbers over 200 kits have been assembled for Heidelberg and only 25 presses installed, why would Heidelberg want to increase production to 40/month when they still have 175 on hand and 90 or so scheduled for shipment before December 31? Heidelberg can not possibly install one and a half presses per day to start eating into the inventory buildup. Nobody in authority has ever publicly commented about the size of the Heidelberg order book for QM-DI's but after DRUPA it was widely speculated to be over 600. But in the intervening year of delays in shipping a commercial version since DRUPA, it has been speculated by industry followers that the backlog has dropped to less than 400. This is backed up by facts such as UARCO's first delivery in Elk Grove Ill. was a cancellation of an existing order already paid for and shipped. This allowed UARCO to jump from 50th in the Q to perhaps the number 8 install in the U.S. in late June.
(2) Fact: Robert Howard, Richard Williams and Lawrence
Howard continue to own a total of 3,0214,000 shares of Presstek (19%) after recent sales. (Fiction: These individuals are selling most of their shares.)
No matter how you slice it is still a lot of money. If the stock is so cheap right now, how come they aren't buying? They still have filed to sell more stock.
(3) Fact: Presstek's patent position is extremely strong.
Presstek, exclusive of any patents held by its subsidiary, Catalina
Coatings, has 48 U.S. patents allowed or issued and 14 U.S. patents
pending. (Fiction: the company has patent problems.)
Presstek's patents are only as good as their ability to defend them. From a fundamental and logical point of view, Heidelberg would be much better off selling a press that consumes non-proprietary plates. Presstek has in fact been less than forthright with the public about their patent position as follows. On June 13th the company stated that the Agfa arbitration proceedings "do not involve the validity of our patents" and again on June 21st they stated "None of our patents are in dispute". This can not possibly be true if the following statement from Agfa on April 28, 1995 is true. " Agfa . holds U.S. patent number 5,378,580 and counterparts in Europe and Japan. . Presstek's PEARL plate sales constitute an infringement of the above U.S. patent." This stated fact was the basis upon which Agfa brought this matter to arbitration. Hence by definition some of Presstek's patents are in fact in dispute. Regardless of the outcome of the arbitration this fact is apparent, the validity of Presstek's patents is being challenged on a number of fronts.
And so it goes. We want you to remain alert! We want you to separate fact from fiction. We want you to be on the lookout for these fictional "news items" that carry no meaningful reference.
We have in front of us the June, 1996 issue of Business NH magazine. On its cover is a fine portrait of Richard Williams, CEO of Presstek, with a title, PRESSTEK, HOTTEST OF THE PUBLIC 100. Inside, it explains why Presstek came out on top of this magazine's evaluation of all New Hampshire companies. There were four categories considered. (1) Most profitable (2) Highest return on employees (3) Biggest jump in sales 1994 to 1995 and (4) Highest market value. It's refreshing reading. Copies should be sent to some myopic New York scribes!
Our old friend, Tom Phelps, who wrote the book 100 to 1 in the Stock Market back in 1971, taught us that one great benefit of long-term investing in fast-growing stocks is that you take advantage of the unforeseeable and the incalculable, yes, the unforeseeable and the incalculable. For example, in our present earnings estimates sent to you two weeks ago, we assume that average plate consumption per machine is 35 plates a day. This figure was given at Presstek's annual meeting. It's based on early results, so that number may be low. While no one currently knows, it is probable that in the years ahead, this average daily plate consumption could grow significantly. Why? Because of the practicality of shorter press runs, as low as 200 copies a job. In this case, a printer would be consuming plates
much more rapidly. Also, there's the probability of more two-shift usage of the Quickmaster DI."
At 200 impressions per job, the costs of the consumables has to come down significantly in order to remain competitive, because the smaller the job, the more sensitive the price of the consumables is to the printers profitability
"We continue to enthuse about Presstek because it meets all eight of our investing criteria perfectly: (1) a small company. (2) A revolutionary product. (3) Comprehensive patent position. (4) Potentially gigantic recurring income from disposable plates. (5) Excellent innovative management. (6) No debt. (7) Huge mass markets. (8) Strong positive momentum in its stock."
Lets address your 8 criteria as follows.
1. Yes everything about Presstek is small except its market cap.
2. Evolutionary not revolutionary.
3. The vulnerability of the patents was discussed above.
4. Gigantic? Gigantic describes the size of the competitors, Fuji, Kodak, Agfa, Toray etc.
5. No comment, although I think it is a bit premature to judge them as excellent.
6. See discussion below about the $28 million in capital expenditures.
7. see #4 above.
8. We now stand at 12 weeks of under performing RP. What excuse will you give when we go past 13.
"There are now 15,855,076 shares of stock, of which management owns 19.1% or more. There is no debt. We are now starting to see the beginning of the sales and earnings explosion we have been anticipating. Note the acceleration in sales by quarters: 41%, 72%, 81% and 117%. And earnings: 0%, 67%, 100% and 700%. And profit margins: 3.3%, 11.4%, 17.6% and 18.7%. Excellent! Sales over the past four quarters totaled $34 million. Earnings this year should soar to $.80 or more a share, up from last year's $.18 a share."
See my comments at the outset about the slowing momentum in sequential sales and earning growth. In order, to reach your $0.80/share for this year, the company is going to have to report an average of $0.31.share in each of the last two quarters! My estimates for each of Q3 and Q4 forecasts EPS of $0.07 in each based on unit shipments supplied by the company in their press releases of June 6th, and July 22nd as well as the margins and cost ratios reported in Q2. Please explain to me how your bottom line could be almost 4.5 times as large as mine. We won't even bother discussing your estimates of $5.00 and $40.00 in EPS for 1997 and 1999 respectively contained in your faxed letter to subscribers of June 7, 1996.
As you know, we are long-term investors. When a super-growth stock like Presstek, one of our Heritage Stocks, is moving ahead rapidly in a long-term uptrend, there can always be violent corrections from time to time that seem to come right out of the blue. We've told you to expect sharp severe corrections. And this one certainly was, occurring over a matter of only three weeks. But we want you to know that the positive momentum of Presstek is still very much intact. Now, in the weeks and months ahead, we'll all be watching the stock to see how fast it recovers from this recent selloff. Based on all of the current excellent fundamental news, we expect the stock will make a fine showing for itself. It will be yet another indication of the power behind this stock.
In conclusion, we consider Presstek to be the best stock we have ever
uncovered. We frequently refer to it as the Stock of the Decade and Son of Xerox. We added Presstek to the Model Portfolio on July 6, 1994, at a price of 13, adjusted for two stock splits. We featured Presstek as the January, 1995 Stock of the Month, when the stock was trading at about 22. Then we featured it again as the April, 1995 Stock of the Month, when the stock was trading around 29. And today with the stock back down to around 43, we think it's time to feature it once more as the Stock of the Month. New subscribers, buy. Long-term holders, continue to average up. It's a golden opportunity!"
No Comment
#838
.
"But we're all human. And all too often, situations pop up that appear attractive and cry out for a little bending of the rules. In short, stocks come along that look like bargains. To a Macintosh zealot, for example, Apple Computer looks like a steal today, selling at just one-third of last-year's sales. But Apple has lost money for the last three quarters! Similarly, a stock like Saf-T-Lok (which we recommended earlier this year as a low-priced long-term speculation) is tempting to anyone who sees in the firm a way to prevent some of the nation's accidental handgun shootings. But Saf-T-Lok (so far) has no sales! Well-managed Micron Technology, which we sold last October for a profit of 85%, is certainly attractive to some investors here, about 76% off its high. But Micron is being squeezed by a glut of DRAM and SRAM memory chips, and profits have shrunk in the past two quarters! Finally, consider Summit Technology which we sold in March (at 24) and in April (at 18) for profits of 443% and 301% respectively. Summit, in possession of the long-coveted FDA approval of its eye laser surgery, may look like a bargain today at $7. But Summit lost money in the last quarter, and its customers are screaming "Foul!" at its hardball tactics. All these companies, despite their attractions, must be viewed as problem companies. And while human nature often attracts us to these problem companies masquerading as investment bargains, you'll usually do better investing in successful companies.
MORE GOOD NEWS ON PRESSTEK
After reading the above, you should ask yourself, "Is Presstek, (Model
Portfolio Stock), a successful company or a problem company?" And THE answer is, "Successful, of course!"
Not THE answer, but your answer.
"Presstek has developed a revolutionary printing plate imaging system that is already a featured attraction on several Heidelberg printing presses and promises to bring Presstek enormous recurring income from the use of disposable printing plates. We call Presstek son of Xerox because of its similar method of generating income (Xerox charged early users for every copy they made) and because Presstek is likely to be as profitable an investment as Xerox. . . . .for those who
hang on for the long term.
To judge Presstek's success, just look at the numbers. In the second
quarter, revenues were $11.9 million, up 116% from the previous year. And earnings were $.10 a share, up from a penny the year before. Then look at the latest 10-Q, where management discloses that it plans to spend $28 million to construct a new plate-making equipment facility!"
We have already discussed the slowing in sequential Q over Q numbers. Last years Q3 numbers were $0.05/share so year over year comparisons are going to become less attractive. Even if the company should hit your $0.80/share estimate for the year, comparisons with Q's 3 and 4 of last year aren't going to be nearly as good as Q2's 10 fold increase! I have highlighted the word disclose above to prove to you that this company does not disclose anything meaningful in their MD&A in the 10Q. Case in point is the almost unbelievable decrease in COGS in Q2. With the exception of the words in the Q1 10Q ".of which $638,000 related to Catalina" the wording was identical in each Q, except the numbers of course. This is not discussion, nor disclosure, this is fill in the blanks. Likewise the so called discussion and analysis for any other category is simply a change in the numbers from the prior quarter.
In terms of the disclosure of the commitments for the $28 million in capital expenditures, I note the following. The company does not have a firm plan in place to finance the expenditures but it looks as though they are exploring the use of debt which breaks your 6th investment criteria stated above in # 833. It should also be pointed out that adding manufacturing capacity for plates will add to the risk of the enterprise and increase overhead substantially.
While on the subject of disclosure, why do you have no ongoing disclosure in your newsletter about your personal and money management's share ownership interest in Presstek? Likewise the SEC investigation into your activities and the fact that you are a defendant in the class action suit should be fully disclosed in an appropriate manner in each issue. After all a new subscriber might be completely unaware of these facts and the potential conflicts of interest.
"Finally, consider the price and relative performance? What do you see? A long, strong uptrend, reflecting a young company on the verge of great things. Yes, the stock is volatile, most recently boasting a round-trip from 60 to 200 back to 60 in a quick seven months. But that's not unusual, considering the intensity of investor interest in the stock on both the short and long side."
Young? This company has been in business almost 10 years! Relative performance? I am sure we are all interested in your response to the question about 13 weeks of under performing RP coming up on September 6th.
What's important is to stand back, look at the long-term trend and ask if the company is still on track. Read the August issue of Printing
Impressions magazine, which relates how the Waterless Printing ssociation produced the June issue of their Waterless Currents as a seven-color job on an eight-color press using Presstek's plates, "with impressive results." Or take a look at the July, 1996 Printing Impressions Official Master Specifier, a buyer's guide for the printing industry. Inside the front cover you'll find a two-page spread ad by Heidelberg touting three of its presses, the very first of which is the Quickmaster DI, which uses the patented Presstek plates. Heidelberg promises, "The Quickmaster DI can transform a Postscript file into 500 process color pieces in under 15 minutes." Printers around the world are lining up for this great press, and Presstek's biggest problem is managing its growth."
If the order backlog is so large it seems rather wasteful for Heidelberg to be advertising. Perhaps the backlog is going in the other direction. After all Presstek used to supply investors with an order backlog number last year but now no longer does. Makes one wonder doesn't it? Have you ever thought that perhaps the investors lining up to sue the company and you is growing substantially faster than those printers you mention above? By the way, around the world is a little misleading at this stage as third world countries don't have enough up front desk top publishing to be interested in this technology anytime soon. Furthermore the far east and its character based languages don't lend themselves to this digital technology nearly as much as the west. Presstek's biggest problem is not managing its growth but rather living up to the unrealistic expectations of its growth put forward by yourself.
I , and I am sure numerous others look forward to hearing from you in reply.
Pierre Panet-Raymond |
