Yet another GKM report on OPMR posted on Yahoo
Optimal Robotics(OPMR)
?Use Pullback As Another Opportunity--BUY
Scot Ciccarelli, CFA Deron Kennedy, CFA
February 8, 2000
Target: 52 S&P 500: 1424
Shrs Out/Mk Cap: 13.3Mil/$405.7 Mil 5 Yr Est Growth Rate: 50%
Div/Yield: -/- LTD/Cap (1999E): 0%
Avg Daily Vol: 149,500 ROE (1999E): 6%
Float: 7.6Mil EBITDA/share (1999E): $0.12
FY Ends -- EPS -- -- Fully-Taxed EPS* --
Dec. Curr Prior P/E Curr P/E
98A $(0.52) N.M.
99E# $0.16 N.M. $0.10 N.M.
00E# $0.50 61.0x $0.30 101.7x
01E# * $0.95 32.1x $0.95 32.1x
Qtrly -- 1Q -- -- 2Q -- -- 3Q -- -- 4Q --
EPS@ Curr Prior Curr Prior Curr Prior Curr Prior
98A $(0.12) $(0.13) $(0.14) $(0.14)
99E# (0.08)A 0.05A 0.12A 0.02
00E# 0.10 0.16 0.19 0.04
^ Intraday; @ Quarters may not total due to rounding - quarterly figures are un-taxed; * Assumes a 40% tax rate, company should become fully taxed in '01; # Diluted EPS in US$ as per Canadian GAAP; N.M. - Not meaningful.
Potential reasons for stock pullback seem shortsighted; favorable price to build positions. The
downward movement in OPMR shares has coincided with relatively light trading volume. In our opinion, this
indicates that the selling has largely been by retail investors. We have seen such waves of profit taking in the
past and, if history is any guide for the future, these pullbacks have typically provided investors with an
attractive price to build positions. We believe the current situation is no different. Therefore, with
fundamentals that continue to strengthen, we continue to rate OPMR BUY with a 12-month price target of
$52.
We have heard several reasons why the stock is under pressure, including:
1. Simple profit taking. OPMR shares ran from $29 to $38 in a short time period, right after the company?s
latest announcement with Meijer. Some may be speculating that this is the last of the company?s major
announcements. We firmly believe this is not the case.
2. NCR received an order by a Turkish retailer for its self-checkout system. NCR received an order for 50
of its self-checkout systems by Migros Turk, a large Turkish retailer. We suspect some people may be
viewing this order for NCR?s system as the beginning of real competition for Optimal Robotics? U-Scan
Express system. We have several thoughts regarding this development. First, NCR has been working on
refining and attempting to sell its system for roughly three years. To our knowledge, this is the first
?meaningful? order for NCR?s system and we note that the order was not from a US-based retailer.
Nevertheless, we do believe competition in the self-checkout arena will continue to intensify over time, as
more companies recognize the tremendous opportunity. NCR could very well be one of the main players.
Additional competition could help further accelerate market adoption of self-checkout technology, in our
opinion. However, despite these beliefs, Optimal Robotics is still the clear market leader in the US (even
though Symbol Technologies and now NCR to an extent have achieved some success overseas). Plus, the
company is poised to expand its already sizable lead over the competition as it prepares to debut two new
self-checkout systems, one for large-order checkouts and a single-bag unit for small-store footprints or for
departments within larger stores.
3. PSC posted weaker than expected revenue growth. Some investors may have extrapolated PSC?s lower-than-
expected 4Q revenues of $55.1 million vs. our $63 million estimate (and vs. $58.9 million in 4Q98) as
negative for Optimal Robotics. On the contrary, we believe Optimal?s U-Scan unit sales increased three-fold
YOY from 17 in 4Q98 to at least 51 in 4Q99. We also remind investors that Optimal?s business is fairly
seasonal, as most retailers cease changes to stores around Thanksgiving. Despite this fact, we believe
Optimal may have exceeded our 4Q system sale forecast.
4. GKM has registered its three year old warrants. A recent filing with the SEC indicates that Gerard Klauer
Mattison has registered for sale warrants that it received as part of its fee relating to Optimal?s IPO back in
October 1996. This is not the same as selling stock. What GKM has done is register its warrants so that it
can exercise them and then sell the associated stock at some point in time. Since the warrants are
exercisable for five years and now expire in less than two and are deep in the money, we believe such an
action is extremely logical. We also note that GKM has had the ability to register the warrants for the vast
majority of the last three years and has only chosen to do so recently to coincide with its own fiscal year end.
5. Nuisance suit is receiving plenty of attention on the chat boards. The lawsuit filed by International
Automated Systems (IAUS) against Optimal Robotics on July 2, 1999 (and subsequently rehashed in a
press release in January 2000) continues to receive a considerable amount of electronic ink on Optimal
Robotics? chat boards. Here is what we believe to be true:
IAUS has filed a lawsuit against Optimal Robotics, PSC (for its involvement in the U-Scan
system) and Kroger (for using the U-Scan system) because of a claim that Optimal violates an IAUS
patent relating to the weighing system incorporated into the U-Scan system.
Optimal indemnifies all of its partners and customers against liability, so the lawsuit should not
affect Optimal?s sales or relationship with any of its customers.
Extensive reviews have been conducted by Optimal?s patent attorneys as well as by independent
third party lawyers (such reviews must be conducted before any security sale). While we acknowledge
that patent law is tricky and not an exact science, all the current evidence seems to indicate that
Optimal?s system does not violate any existing patents, including the one claimed in the lawsuit. In fact,
several patents by Dr. Schneider (the original inventor of U-Scan and, essentially, the founder of
Optimal) discuss in detail the differences between the U-Scan system?s weighing system and other
weighing mechanism patents on file. In fact, Dr. Schneider's patent specifically cites patent #4,787,467,
the one IAUS has called into question.
IAUS is currently under investigation for making false technology claims. This publicly traded
company currently has no revenue according to its public documents.
In an absolute worst case scenario, we believe Optimal could alter its weighing process or even
license the rights to employ its current methodology. It seems reasonable to us that a company without
any current revenue stream would be anxious to license its technology. While we believe this last
scenario is highly unlikely, we put it out simply as a ?what if? scenario.
INVESTMENT CONCLUSION
The real question here should be ?So what about the fundamentals?? After all, we believe a company?s stock
performance will ultimately follow the company?s business performance. And in that regard, we remain extremely
bullish on OPMR shares and on the growth potential of Optimal Robotics and its self-checkout technology. Labor
markets remain very tight and retailers are continually searching for ways to enhance customer service. We
believe that the partial automation of a retailer?s front-end through providing a self-checkout system achieves
both of these goals. Plus, Optimal is the undisputed leader in self-checkout technology in the US. We believe the
company has significant opportunities to increase its domestic penetration with both existing accounts and new
accounts. Further, the company is already expanding its addressable market by introducing two new systems,
each of which has very significant growth opportunities, in our opinion. Finally, while the company has
approached the opportunity carefully, we believe the international markets provide Optimal with another
substantial incremental growth opportunity. Therefore, we believe OPMR valuation will continue to be driven by
its revenue and market share growth in the near-to-mid term and its earnings growth as we get into 2001 (we
expect 2001 is when the company?s true profit potential should begin to come to light, as the company takes over
the assembly of the U-Scan system). Thus, given Optimal?s very high degree of revenue and earnings visibility,
we continue to rate OPMR BUY with a 12-month price target of $52. |
