This is in reply to Mr. Vester (I.N., that is...)
You're right on regarding discounting the Irish rebate into income, since it is non-recurring.
And you are right on in concentrating on margins once the company comes into production. Now, company management has stated that they are comfortable in achieving a 40% gross margin operating "at normal full production" with 3 lines up. If this is indeed the case, then the company could achieve, in my opinion, a 27%-30% pretax margin, since depreciation will be about $ 3.0 mm/year and GSA should not exceed 10-12% of revenue (there's really no sales force - the company is selling to OEMs). The question I have is, what is "at normal full production"? Clearly it is 2.0 mm units/year on line 1 and 7-8 mm units/year on lines 2,3, etc.. But I doubt that the ocmpany will get to those annual run rates before mid 1998. And maybe not then.
My experience is that if they or any other company produces at 50% of "normal full production" run rates, than the gross margins will slip substantially - maybe to 25% instead of 40%. Now at 40% GMs and 12% GSA, I can make a solid case for 20% aftertax margins due to the low tax rates. And at that rate, the company will earn roughly $ .01 per share for every $ 1.0 mm of revenue.
What I cann't figureout is the deterioration from those levels if less than "normal full production" is achieved. This is apparently what the Red Chip Review analyst is doing. |
