What Smart Alecs & sons are saying re ENVY:
ENVOY CORPORATION [ENVY] "BUY"
Recent Hoopla Over Potential Accounting Restatements Overdone
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Date: 08/19/1998 EPS 1997A 1998E 1999E
Price: 22.81 1Q 0.16 R 0.24 NE
52-Wk Range: 56 - 22 2Q 0.19 R 0.26 A NE
Ann Dividend: 0.0 3Q 0.21 0.29 NE
Ann Div Yld: 0.0 4Q 0.22 0.31 NE
Mkt Cap (mm): 490 FY(Dec.) 0.80 1.10 1.47
3-Yr Growth: 35 FY P/EPS 28.5X 20.7X 15.5X
CY EPS 0.80 1.10 1.47
Est. Changed No CY P/EPS 28.5X 20.7X 15.5X
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HIGHLIGHTS:
-- Envoy's stock is down due to concerns that the Company may restate its
accounting for its HDIC acquisition.
-- Our "worst-case" calculations indicate that a restatement could have a
$0.25 negative impact on 1998 and 1999 EPS. Our estimate of the most likely
impact is $0.07-0.11 in 1998 and 1999.
-- Our investment rating on the stock remains "buy" and our 12-month price
target range is $37-44 or 30x our 1999 EPS estimate range of $1.22-1.47.
DETAILS:
Envoy's stock is down 37% over the past few days due to concerns that the
Company will have to restate earnings resulting from an SEC review of the
Company's acquisition amortization policy. The SEC has questioned the
valuation of purchased R&D costs and amortization periods for the NEIC, DSS
and HDIC acquisitions. Envoy is in the process of retaining an independent
appraisal firm to evaluate its current valuation methods, and we would
expect the Company and the SEC to reach some sort of conclusion within the
next 4-5 weeks.
We believe there are 3 potential outcomes of the independent appraisal
firm's findings and the SEC review.
1. Envoy is allowed to proceed with its secondary offering with no
restatements. Should this approach be taken, there would be no impact on
our current EPS estimates for Envoy of $1.10 in 1998 and $1.47 in 1999.
2. Envoy restates 1996, 1997 and 1H 1998 results to include
amortization expenses associated with in-process R&D and goodwill carried as
an asset on the balance sheet instead of written off.
Should this approach be taken, there would be approximately $0.25 in
additional expenses. The following table outlines our "worst-case"
analysis. Our $0.25 impact is based on 15-year amortization.
Written-off in-process technology (NEIC, DSS, HDIC) $(68,700)
NEIC Goodwill (47,000)
TOTAL $(115,700)
Annual Amortization $(7,713)
Effective after-tax @ 19% (6,248)
Shares Out 25,400
EFFECT ON ANNUAL EPS $(0.25)
Pro forma 1998 EPS $1.10 $0.85
Pro forma 1999 EPS $1.47 $1.22
12-Month Price Target (30x) $37.00
3. Envoy adjusts its accounting for the HDIC acquisition only
(completed in August, 1997) amortizing the $35 million in in-process R&D
originally written off. Should this approach be taken, there would be a
range of $0.06-0.22 negative impact on our current EPS estimates for Envoy
of $1.10 in 1998 and $1.47 in 1999. The following table outlines our
analysis.
HDIC in-process technology $(35,000)
Amortization Period (Years)
5 10 15 20
Annual Amortization $(7,000) $(3,500) $(2,333) $(1,750)
Effective after-tax @ 19% (5,670) (2,835) (1,890) (1,418)
Shares Outstanding 25,400
EFFECT ON ANNUAL EPS $(0.22) $(0.11) $(0.07) $(0.06)
Pro forma 1998 EPS $1.10 $0.88 $0.99 $1.03 $1.04
Pro forma 1999 EPS $1.47 $1.25 $1.36 $1.40 $1.41
12-Month Price Target (30x) $38.00 $41.00 $42.00 $42.00
Additional Information Available Upon Request
BT Alex. Brown Incorporated maintains a net primary market in the common
stock of Envoy Corporation.
Within the past three years, BT Alex. Brown Incorporated or a predecessor
has managed or comanaged a public offering of Envoy Corporation.
The following stock(s) is (are) optionable: Envoy Corporation.
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