The results of my conversation with Equinox (EQNX) management on Wednesday, December 17, 1997:
I spoke to Rob Hamilton of Equinox about a couple key issues, in particular (though not in order):
1. The business fundamentals
2. Earnings forecasts
3. The nature of the recent insider selling
4. Asian exposure
5. Buyback program (they tipped their hand before I could give an update)
(Please note that the following buyback remarks were made before the press release made today)
I started to warm up the conversation with an update of the buyback program that was initiated in December of 1996. He reminded me that in fact two programs were initiated, with the current one being started on the heels of the previous program's completion. The current program, as we all know about, was initiated to repurchase one million shares of company stock because management felt that its shares were undervalued. Given the number of outstanding shares to be in the mid-three million mark, this development was and continues to be extremely significant. Nearly half of the shares to be purchased under the program, 450,000 shares, were purchased at an average approximate price of $8.50, meaning that 550,000 shares of the buyback program had not yet been completed (subtract today's activity for the current total).
We next moved on to the current earnings estimates. My figures showed estimated earnings to be $0.30/share for the following quarter, but instead of reminding him of this figure, I allowed Mr.Hamilton to continue the conversation. To my pleasant surprise, he referred to earnings expectations of $0.33/share, and while management does not comment mid-quarter about earnings estimates, he did mention how management closely looked over the earnings projections subsequent to the release of the Third Quarter figures and found them to be comfortable with the expectations laid out at the time. The yearly total estimate stands at $1.04/share.
Naturally, with earnings now being the focus of the conversation, I tilted the subject to the recent market weakness in Equinox's stock. I asked if perhaps some unreported business developments had taken place that were being recently reflected in the stock price, and he offered the following:
To his knowledge, there were two key influences that were depressing the share price:
1. The current broad market weakness in technology stocks.
I currently know of no technolgy issues that have come out of this weakness unscathed. In my daily analysis of various stocks, I have noted that a majority of the trendlines I drew on stock charts were downtrending, and were particularly weighted on the technology side. Mr. Hamilton's argument is certainly valid on this point.
2. The dissemination of news regarding the multiple Form 4's recently filed with the SEC. Form 4s, as we know, are filings to indicate a reduction in management's stake in the company(i.e. selling shares). (Coopie, I think it was you who was all over this the moment it came out). He acknowledged that many investors would see this as a potentially negative vote of confidence in the company prospects.
However, the selling represented a relatively small reduction in management's cumulative stake in the company, from 20% to 15%. In addition, the majority seller, the President and Founder of the Company sold only 12% of his entire holdings of the company stock, for diversification purposes. A majority of the sellers, having also worked for about 10 years with the company--all the while experiencing all time new highs for the stock, took advantage of these prices by selling and taking profits. As mentioned before, the cumulative total in management's hands was reduced from 20% to 15% total shares outstanding.
Mr. Hamilton commented on how the business fundamentals remained strong and intact. Their relationship with Hewlett-Packard still remained solid, and management had good hopes for 1998. Part of these expectations come as a result of some contracts related to NCR (I wasn't aware of this development, nor what kind of entity this was) that have been completed (one) and eight others still in negotiation.
He also provided a welcome aside, and that was a story about how while attending the American Electronics Association Conference in the fall, Equinox was ranked # 1 based on the Association's financial criteria for the microcap category. (A brief glance at the company's financials will show you its sterling silver quality, IMO). The company is cash positive, they watch their costs closely, and outsource their manufacturing to keep costs down. The company has no debt and their buyback program is still in effect.
Sometime during the conversation he addressed the Company's exposure to international markets. He felt that the Asia problem would have NO direct impact on the company, for they had only a relatively small amount of their revenues come from that region. In addition, the currencies under which they made transactions were already in US dollars. He repeated that there would be little impact, if any at all. To date, approximately 20% of the company's revenues come from overseas, with the largest contributor coming from Europe, number two being the Pacific Rim, and the last being the Latin America region.
Overall, the conversation was reassuring. With their exposure to Asia being minimal and with most technology issues experiencing broad market weakness, it would appear that the depression in share prices may have been unwarranted and overdone. But I believe the greatest vote of confidence of all was the company's intervention in today's markets to purchase 100,000 shares for their stock buyback program. (The only question now is who bought that other 100,000 shares if it wasn't the company).
The company's financial condition is indeed very attractive. Up to date, I have found few that can equal it: 0% debt, a current ratio of 4.69, $3.89 cash per share (equal to 25% of the share value), and an increasing return on equity of 15% (reflecting increased management effectiveness).
In addition, the company is currently trading at a price/earnings multiple of 17.3, compared to the S&P 500 at 21.5. The company is projected to grow earnings at a compounded rate of 31.2% for the next 5 quarters, implying a "fair value" target of approximately $27.75 if the company's earnings multiple were in line with its growth rate.
However, I would prefer to reduce the multiple to a more conservative level, to about 25, for a target of $22.25 in six to eight months, which represents a premium of 44.7% above current prices. Note that further upside potential exists for this stock. One final note: for the last seven consecutive quarters, Equinox has either met or exceeded analyst earnings expectations. It would appear that the potential for Equinox remains bright.
Regards,
Rainier Trinidad |
