Today was the highest volume day since Q4 1997! Looks like a breakout, assuming we get some follow through tomorrow.
Re: Ertl. Let's do some math. If RACN paid 10 times trailing earnings for Ertl, then Ertl had trailing earnings of about $10 million, on sales exceeding $175 million. That's a net income of 5-6%, less than RACN. Still, because the deal was done with cash, it should be accretive, even after considering the increased interest expense.
Let's assume that Ertl's business can generate $200 million in sales for the year ending 12/31/99, compared to $175 million for the year ending 9/30/98. That slightly more than 10% annual growth. Assume also that Ertl's net income is 5%, yielding $10 million in profit for FY99. This is conservative, since it assumes zero profit growth for Ertl. (I think that synergies with RACN will certainly expand Ertl's sales at a fairly rapid pace, relative to historical rates.) If RACN's sales can grow by 25% in 1999, from $156 million to $195 million, the combined entity would have nearly $400 million in sales for FY99, or about 18% sales growth (a reasonable assumption).
If RACN is able to hold operating margins at 18.5%, it would have $36 million in operating profit. After adding the $105 million in debt to the existing debt of $34 million, the company will have $139 million in debt. Last year, interest expense averaged 7.5% of debt outstanding. Assuming a higher interest rate of 8.5% this year, RACN would pay nearly $12 million in interest expense. That would reduce pretax profit to about $24 million.
With a nearly 40% tax rate, net income from RACN division would be about $14.5 million. Add in the Ertl figure of $10 million, and RACN could have net profit of approximately $24.5 million in 1999. With diluted shares of about 17 million, RACN could have 1999 EPS of $1.44.
IF these estimates are correct (and they're simply educated guesses), RACN is trading at 10 times 1999 EPS. (Analysts still have an estimate of $1.13). Based on expected growth rate and profit margins, RACN should trade at more than 1 times sales. This would give a 1999 price target of approximately $25 per share (17 times 1999 estimates).
I suppose we'll wait a few weeks for the pro formas.
Todd |
