Found a good article on this company!!!
Optical Cable Corp. (OCCF) is a small but profitable manufacturer of high bandwidth fiber optic cable,
mainly the multimodal kind used in traditional local area networks deployed by corporations for data
transmission. Based in Roanoke, Virginia, the company has been operating since 1983 and recently went
public.
By all accounts, Optical has done well. For the third quarter ending July 31st, the company reported that
sales rose by 25% to $10.9 million from $8.7 million the previous year. Net income before taxes
increased by 59% to $2.98 million from $1.88 million.
For the first nine months of 1996, sales increased by 19% to $31.4 million, up from $26.3 million. Net
income before taxes increased by 50%, to over $8 million from $5.3 million. And the fourth quarter is the
industry's strongest.
Moreover, gross profit margins for the quarter remained at a very healthy 45.6%, near the previous
year's levels but up from the second quarter's 40.2% rate. For the first nine months of 1996, the gross
margins tallied 43.8%, about half a point above the previous year's figures.
The third quarter numbers also revealed that selling, general, and administrative (SG&A) expenses had
dropped as a percent of sales to just 18.5% from 23.4% the previous year.
Optical's business has been growing at about 21% a year over the last five years, but Robert Kopstein,
the company's Chairman, CEO, and President, says the overall fiber optic business is growing in the mid
20% range at the moment and should see that rate increase by 2-3% a year until it approaches 40% a
year by 2000. He believes Optical will grow faster than the industry and is projecting 35% growth for
1996.
Amidst all this good news, however, Kopstein has found his company under attack from both the offline
press and online investors (see ROGUE's earlier story on Optical). Early in the summer, Floyd Norris,
financial columnist for THE NEW YORK TIMES, said that Optical was "evidence that speculation is truly
running amok" in the market. Alan Abelson of BARRON'S concluded that Optical "talks big, but it's a
small player in a very competitive field."
Individual posters in Optical's folder in THE MOTLEY FOOL have echoed these questions regardng
Optical's product and market valuation.
In June, one seemingly well-informed investor with ties to a likely Optical competitor cast doubt on
whether the company's indoor/outdoor cable offers the advantages claimed for it by the company. He
and other critics charged that Optical is hardly in a well-protected market niche, as the company has
suggested. It's really just a commodity business with Optical repackaging cable and a protective outer
sheath that it purchases from other suppliers.
Few barriers to entry, the critics charge, mean that fierce competition will soon drop Optical's margins,
especially since the company seems to be pursuing more business in the fastest growing segment of the
market for optical cable, which is the lower-margin, single-mode cable used for telephone, cable
television, and Internet connections.
Other investors have stuck closer to the question of valuation. As adjusted for two two-for-one splits, the
company went public at $2.50 a share at the beginning of April. The shares rose to $34 in May, before
then falling. After a recent dip below $10 and a recovery to near $20, Optical's shares currently trade
around $16 a share. With 38.7 million shares outstanding, the company's market capitalization is around
$619 million.
Sales this year should be in the mid $40 million range. In August, the company's best month ever, sales
rose to $4.3 million, or about $51.6 on an annualized basis. But so far in 1996, sales have only increased
by 19%. Earnings have done better, but are still just 13 cents a share for the first nine months of the
year. A strong fourth quarter may raise that to 19 cents for the year.
Optical recently issued a press release pointing to its high 39.8% return on equity (ROE) as compared to
the 16% ROE rate for the benchmark S&P 500.
Indeed, it's hard to believe that Optical Cable is really worth six times what it was valued at just over five
months ago. And in fact, Optical's would-be underwriters, Unterberg Harris and Piper Jaffray, actually
backed out of the IPO earlier this year because they refused to price the offering above $1.75 a share.
Kopstein scoffs that these underwriters were simply "ignorant" about what they were dealing with.
Looking for $2.50 a share, he decided to orchestrate a do-it-yourself initial offering. The company found
852 purchasers, many from the Roanoke area, but ended up selling less than half the shares it had
offered.
But rather than cautioning that Optical may have risen too far too fast, CEO Kopstein has followed his
maverick IPO with a public relations campaign that critics charge amounts to outright hype. On May
13th, the company issued a press release entitled "Attention: National Stock Brokers." The notice talked
up the company as an Internet play with more promising markets than even the giants in the Internet
equipment industry, such as US Robotics or Cisco Systems, which then traded at an average PE of 45.
Kopsstein himself is the principal stockholder, with an enormous stake of 36 million shares, or about 93%
of the outstanding shares. Critics believe his promotional activities are designed to keep enough juice in
the stock to allow him to cash out some of his shares without decimating the price.
The small float has helped keep the stock in demand, but increasing the number of shares in the float
would ease the supply pressure that's been keeping the stock up. Kopstein has already stated his desire
to float a secondary offering at some point.
On June 17th, Optical said it signed "a very large contract for $13 million" with a telephone company in
Japan to "supply approximately 3000 miles of fiber optic cable for long distance telephone type
applications"
This past Thursday, the company announced a "key large project" worth just $0.3 million dollars. The
deal is a "key strategic accomplishment" since it shows the company is making progress in its efforts to
"compliment [sic] the existing global fiber optic cable producers, rather than compete against them." This
latest deal has Optical making 40 kilometers of 24 fiber single-mode cable to be resold by a "major long
distance fiber optic cable producer."
Kopstein suggests that he's just trying to keep Optical's shareholders informed about the company's
business. But he also admits that since no Wall Street analysts cover the company, no one else is in a
position to understand and thus defend it against the naysayers, so he's taken on the task. Indeed, as
ROGUE has reported, Kopstein has mixed it up with some of those critics in the FOOL folder itself.
Just two weeks ago, Kopstein also took the novel step of issuing two press releases designed to pressure
short sellers, for whom he's clearly disdainful. The numbers for mid-August show 725,000 shares (or
about 27% of the float) have been shorted.
In a press release issued August 29th, Optical indicated that it had "requested the SEC, NASD, and
NASDAQ to look into the short interest position immediately. The only way people can legally borrow
shares for a short position is to utilize someones [sic] 'margin account' shares. We are not aware of
anyone holding shares in a 'margin account'; therefore, the short interest must be coming from 'naked
short interest' which is illegal in the United States. If long term shareholders wish to insure that their
shares are not being used by these short interest players, call your stock broker and ask if your shares
are in a 'margin account.' If they are, and you do not want them in a 'margin account,' ask your stock
broker to immediately put your shares into a 'cash account.'"
Naked short-selling involves selling shares without borrowing them. In theory, it's possible, though illegal,
to short a stock even when there are no shares available in margin accounts to borrow. But naked
shorting is generally overblown, more the province of market makers who can get away with it on an
intraday basis rather than of malicious speculators.
It's also true that Kopstein has no way of knowing whether other Optical shareholders have their shares
in a cash account or on margin. He had apparently read an article about short-sellers in the July 29th
issue of FORBES and realized he could encourage Optical shareholders to initiate a squeeze.
But what Kopstein lacks in market savvy he makes up for in determination. In the initial press release
about short-sellers on August 27th, Optical announced that it would not offer additional shares as long as
this huge short interest persisted. In a phone interview, Kopstein reiterated the position.
"I will not even personally sell a share under these circumstances . . . even though I would like to get
additional shares out into the float so that there are more shares for various institutions and people
looking to do larger holdings." He says he'd like to "have potentially twice as many shares in the float as
there are now. But I damn well won't under the current circumstances."
In the meanwhile, he's convinced he can grow Optical simply by using the available cash flow. And
Kopstein has ambitious plans.
Currently, the company operates out of a 75,000 square foot facility. Optical has ordered a great deal of
new equipment paid for by operating cash and some funds from the IPO. This equipment is currently
being brought on line.
According to an August 19th press release, "With this equipment in place, the existing facility currently
has a yearly output capacity of approximately $150 million based on operating 24 hours per day and
running 6 days per week.This proprietary equipment running with state-of-the-art computer automation
that is exclusive to the Company is currently operating at approximately 1/3 of capacity."
This means that Optical, which expects to do perhaps $45 million in sales this year, will soon have the
capacity to triple production. Additionally, the company broke ground in July on a new $2.5 to $3.0
million facility that is the mirror image of the current one. Built with money from the IPO, the new facility
should be finished by this November.
Good long term potential for this company
Eric S |
