Tom - Appreciate your earlier thoughts. Here are some of mine.
Prior to the acquisition -
ADPT's sales were slowing. Q3 sales revs were lower than in any of
the previous four quarters. Concerns were expressed about the North
American market. Sales revenues (12mos) were running around $1B.
Net Income was dramatically lower than in the previous quarter, and
lower than in any of the previous four quarters. This was partly
caused by progressive increases in R&D spending, and significantly
higher marketing spend (presumably to try and compensate for
decreasing sales). Net income for the quarter was around $27m, and
for the 12mos was running at around $200m.
ADPT had "cash" of around $730m. Interest on this contributed about
$15m to the earnings. (i.e. around 50% of last quarter's earnings).
In general, the disk drive market has been experiencing over-supply.
Pricing competition has driven down profits, and expectations.
A pricing battle generally in the PC space has created additional
pricing pressures on all PC vendors.
Prognosis (prior to the acquisition) - ADPT's future sales revenues,
earnings and EPS were unlikely to meet earlier expectations. Further
quarters like the last one could be likely.
After the Symbios acquisition.
ADPT cash mountain consumed in Symbios purchase. ADPT liquidity
under threat. ADPT loses interest income from cash. ADPT needs to
restructure its finances to generate liquidity. Cash no longer
available for share buy-back. Symbios needs to be integrated into
ADPT business ($) and may require further investment ($). More cash
required. Choices - ADPT issues more shares to raise cash - existing
stockholders are diluted, and EPS drops. OR, ADPT borrows cash, and
has interest payments to make. Sales revenues from Symbios approx
$600m. Earnings from Symbios unclear, but supposedly positive (though
probably not great ?). Earnings therefore not increased short-term,
so overall profit margins (%) down.
Short term prognosis - Gloomy. The acquisition has consumed all the
cash, and there are major integration issues to come.
The future - Symbios sales revenues are around $600m, so combination
now has around $1.6B in sales. Product line-up pruned. Costs reduced
through rationalisation of staffing, and use of new in-house fab.
Acquisition brings further technical talent, and new market
opportunities. ADPT runs combination with skill of olden days.
Prognosis - Hum ?
Historically, ADPT has achieved an average profit margin of around
15% (last 6 years), a price to sales ratio of 3.1, and a PER of 22.
Assuming there is no significant dilution of shareholder equity (!?),
and further assuming the company can achieve it's historical ratios,
then, with $1.6B of sales it should earn $240m, and have an EPS of
about $1.94. The stock price should then be about $40 on a PSR basis,
or around $43 on a PER basis.
The stock price is currently around $24, so the value proposition is
as follows -
ASSUMING that ADPT can regenerate decent cash liquidity AND existing
stockholders are not diluted in the process AND it can successfully
integrate the Symbios business unit AND it can achieve its old ratios
AND pricing pressures in its market do not continue forever.......
THEN in 12 - 18 months time, the stock could be back to $40. (i.e. a
70% gain).
Now, I have a LOT of respect for the management group that has run
ADPT for all these years, and believe in the longer term that they
will make something great out of all this. But, if you ask me when
the right time to invest in this company would be, I'd say that the
stock price will go a lot lower yet, and that some positive news is
first required about how it's going to manage its cash, and how
successfully the Symbios integration is going before I'd put any money
here.........
Any further thoughts ?
Mark
(p.s. I can hear the ADPT longs howling !) |
