alumni.caltech.edu
James makes an excellent point by alluding to the fear and greed surrounding this stock that you can actually see on any daily chart you print out. There are some people on this board who started buying Ampex at $1.00 and they can tell you how the stock has gyrated even as the company's fundamentals have undeniably and steadily improved over the last 3 years.
Some of you who are still trying to get a handle on the true potential of keepered media may find it useful to recreate the EPS matrix that Pennyslvania Merchant Group currently uses. It is difficult to print out a table like that here so I will just layout the assumptions PMG uses so you can do it on your own.
First, KM (keepered media) applies to ALL kinds of magnetic recording so that means keepered rigid media AND keepered flexible media (see R&D pipeline). The use of KM with disk drives is the one ready for commercial use. You can further subdivide Keepered rigid media into Inductive Recording KM and Magnetoresistive KM with KM-Inductive ready for commerical use while KM-MR is about 12 months away.
KM involves the application of a non-precious alloy on a typical platter. The platter market is expected to go from 335 million platters in 1996 (75% inductive/25% MR) to 600 million platters in 1999 (30% inductive/70% MR). The typical platter sells for about $10 to $14/platter, but PMG sidesteps that trickly calculation by using the estimated earnings per share, NET of 40% tax. PMG further assumes that by 1999, Ampex will have 48.5M shares outstanding (including shelf equity of 1.15M shares + option exercises + probably the conversion of $70.0M preferred shares into common with the number of shares used dependent on the price of AXC stock on due date,or 12/97).
In the PMG matrix, the horizontal axis represents the profit per platter ranging from $0.30 to $1.50 while the vertical axis represents the estimated market penetration ranging from 10% to 100%.
So the calculations go like these:
1) At $0.30 profit per platter with 10% market share:
600M platters x 10% market share = 60M platters, then
60M platters x $0.30 profit per platter = $18M, then
$18M gross profit less 40% federal/state taxes = $10.8M, so
$10.8M aftertax profit divided by 48.5M shares = $0.22 EPS - KM only.
2) At $1.50 profit per platter with 100% market share:
600M platters x 100% market share = 600M platters, then
600M platters x $1.50 profit per platter = $900M, then
$900M gross profit less 40% federal/state taxes = $540M, so
$540M aftertax profit divided by 48.5M shares = $11.13 EPS - KM only.
As you refine these assumptions and plug in the numbers keep in mind that Ampex's current target is a BLENDED EPS of $1.00 profit per platter subordinated to the larger goal of making KM an industry standard (read: 100% market share). It is worth pointing out that Ampex sees 3 ways the KM opportunity can be exploited:
1) Licensing
2) Reselling (buying platters on specs from licensed merchant platter suppliers like HMTT and Komag and reselling to drive makers)
3) Manufacturing
One of the things I really like about the way Ampex is exploiting KM is the way it scales in the manufacturing option which offers the highest margins (30-45% of platters costing $10-14 each) and highest risks(capital intensive, yield problems, financing risks, serious bottleneck in the supply of sputtering machines, cross-licensing issues). By using a no-risk licensing and/or reselling strategy at first it gets to boost its cash flow immediately and increase the acceptance of an incremental technology in an industry where the drive makers are making more and more of the components themselves, particularly the heads and media - the 2 largest cost items in a typical disk drive.
I don't know if, as you plug in the figures into the matrix, you will be struck at how Ampex doesn't even have to execute perfectly, or reach 100% of its target profits in order to benefit significantly from KM. At 30% market share and $0.50 profit per platter, the after tax EPS is $1.11! BTW, inductive platters are expected to account for 30% of the total platter market in 1999 so at 30% market share I am necessarily assuming that KM doesn't work with MR, which we now know is not true.
And I hope you don't mind my repeating this again, as the KM earnings become more visible, the additional cash flow will allow AXC to do the following:
1) accelerate the pace of the products in the R&D pipeline(keepered flexible media,DST libraries for new market segments,dynamic image
compression, field confinement heads)
2) expand the marketing of an already-cash flow positive DST core business and expand the distribution and support network. StorageTek, for example, gets 25% of revenues (1996 sales of about $2.0 billion) from supporting its installed base. It is fair to assume that Ampex's DST revenues will eventually assume a similar profile.
3) expand the product development effort to include products that capitalize on its 50+ years of experience in manipulating the different components of audio and video signals. Very few companies have that kind of real world experiences (including the out-of-world experiences that Ampex has from years of participating in the space program and some other black box projects like the SR-71, F-22 etc) and knowledge base. Speculative? Sure, but this is not priced into the stock, anyway. Outdated? No, with all this talk of convergence, the undeniable fact is that analog sounds and images are the raw materials and the finished products of the digital age. Input is analog. Processing and Storage may be digital, but output is analog .
4) go more aggressively after the weasels infringing on all those patents all those years. Incidentally, I count myself as one of those who think that the Mitsubishi lawsuits are like lottery tickets that come free with the purchase of every AXC share. Let Ampex take the case all the way to a jury so they can collect on triple damages and what not. Let Mitsubishi be a proxy for all the times that a foreign company has taken advantage of an Ampex patent without paying for it. Heck, let Mitsubishi be a convenient whipping boy for the refusal, even to this late day, of the Japanese establishment to even acknowledge the seminal 1950s integrated circuit patent (the Kirby patent) of Texas Instruments. My understanding is that since 1982 the U.S. Courts system has been streamlined to expedite the resolution of patent disputes and the consensus is that the process has shifted the odds in favor of the inventor. The proverbial strategic killing, in other words.
There is no reason not to be aware of the true risks of this stock. There is no reason not to be aware of the true rewards as well.
Now off the Ampex soapbox I go. |
