MileHigh,
Some observations about your strawman on SMOD
Quick analysis (not perfect but nonetheless proves value, IMO)
Shares Outstanding = 42.9 million
Current Share Price = $13.75
Current Market cap = $590.00
TTM Sales = $804 million
Current P/S ratio = 0.73 (Bargain)
Granted, this is using ttm sales, but even if they come in below $804, say $720
(10% reduction, which I find unlikely LT) we are still looking at a P/S of 0.82!
I appreciate that the above is a quick assessment, and that if you had
more time you might have talked about their growth opportunities,
liquidity, strategic direction, great management, etc., so let's just
concentrate on the one point that you are really making - i.e. that
their PSR is "great".
I agree for a company with declining revenues that PSR is probably a
more reasonable value measure (and suggest that all PE fanatics might
want to learn more about why), however I do not agree that the numbers
you cite as indicating value are actually that good.
At the moment SMOD are largely a well run contract manufacturing
operation with some moderately interesting design capabilities and
some "volume" front-end sales.
HOWEVER, they are still something of an unknown quantity, and at the
moment (by their own admissions) are signalling a growth slowdown.
This has happened at the time when the industry is experiencing a
general slowdown, and when the market is generally overvalued and
probably due a correction.
If we look at SMODs PSR valuation, and compare it with other
companies with a similar make-up, then SMODs PSR is not that
attractive.
Let's start with a look at SCI. OK, there are two logical criticisms
with using SCI as a reference - (i) it is so much bigger, (2) it
has relatively few products of it's own. However, SCI has DELIVERED
approximately 38% compound revenue growth over the last 5 years,
without much sign of a slowdown. It has exceeded this on earnings
growth. SCI is currently trading at about it's average PSR of 0.3 !
Let's also have a look at JBIL - who have a similar capitalisation
to SMOD. They have an average 5 year compound revenue growth of 42%.
They have given no warnings of a slowdown. They trade at a PSR of
about 1.1, which is at the high end of their 5 year range.
In comparison, we have a forecast from SMOD management that there will be
no revenue growth for a 12 month period (in fact without a blow-out Q4
they will be down cf. FY97). They are a relatively new company,
without a proven long term track record. Earnings are currently in
decline. They have one customer who accounts for 50% of their sales.
There are undefined product quality problems. Communications with
the stock market are not strong.
In this context, why should I not choose the security of SCI (looking
like a consistent high-growth stock) at a
PSR of less than half that of SMOD, or pick JBIL (as the "rising star")
and at a PSR that is not much greater than "troubled" SMOD ?
I'm afraid that I conclude that we will see a PSR of < 0.5 before
big money starts back towards SMOD. On this basis, I do not think
that Towntarget's "short target" of $11 is too unreasonable.
(The company's announcement to buy back stock is good, but if they
attempt to strengthen the stock price with such a move at too high
a price then I fear they will be doomed to failure. If they are
shrewd then they will wait for a few weeks/months).
Mark |
