I bought EFII about a week ago at $22.625. Below is the text (minus charts) of my research before purchasing.
<snip>
Reason for the big drop from the recent 52-week high?
At the time of the company's first quarter earnings announcement, April 12th, the NASDAQ market decline began to accelerate. This general market sell-off initiated EFIs drop from its recently posted 52 week high. Roughly two months later, June 5th, the company warned that second quarter EPS (new guidance $0.38 -$0.42) would not meet analyst estimates ($0.51) and that second half 2000 revenues would fall short of previous company guidance (FY 2000 revenue growth revised to 10% - 13% down from 20%). The revisions were the result of weaker demand due to delays in new product introductions. The EPS warning and Revenue growth revision caused the stock to plummet 31% in one day.
Positives
ú Consistent positive cash flow. Over the past five years the company has generated over $275 million in free cashflow. EFI has generated positive cashflow since 1991.
ú Leading market position. Excluding OEMs, EFI dominates its identifiable competitors with approximately 50% of the market in the trailing twelve months. The closest competitor, in terms of revenues, is the Imaging Division of Imation. However, Imation does not compete head to head in the print server business and its revenues have been declining over the past three years while EFIs have been growing.
ú Copy and printing industries moving to color and digital. The advancement of technology is making less expensive to produce documents of all nature in color and as was with photographs, movies, televisions, computer monitors, document printing and copying will inevitably move to color. Further, digital copying is quickly replacing standard methods of copying because of added versatility and speed and reductions in costs.
ú Valuation. Based on a historical relationship to earnings per share and on a discounted cashflow basis the company looks attractively valued.
Negatives
ú Concentrated sale. The bulk of EFIs sales are to copier and printer OEMs. Canon, Ricoh and Xerox make up roughly 68% of sales. Because the sales are concentrated in one industry and more so to a few large players in the industry, the company's EPS have been, and likely will continue to be, highly erratic due to the decisions of OEMs concerning new product development and introduction. This has been the driving force in the company's two most recent selloffs.
ú Management Strength. All of the key executive positions within the company were recently placed in the current position. Guy Gecht, CEO since 01/2000, with company since 10/1995. Fred Rosenzweig, President and COO since 07/199, with company since 05/1993. Joe Cutts, CFO since 04/2000, with company since 03/1997.Janice Smith, VP Marketing and Human Resources since 05/1998, with company since 05/1993.
Recommendation
Purchase share at a price in the low $20 range. Maximum purchase price of $25.
Business
Electronic for Imaging ("EFI") develops products designed to make high-quality color printing in short-run productions easier and more accessible to the broader market. Its Fiery(R) products incorporate hardware and software technologies that transform digital copiers and printers from many leading copier manufacturers into fast, high-quality networked printers. The Company's Fiery products include stand-alone servers, which are connected to digital copiers and other peripheral devices, and Fiery controllers, which are embedded in digital copiers and desktop color laser printers. The Company sells its products primarily to original equipment manufacturers in North America, Europe and Japan.
The Company has a model for almost every major digital printing technology today, including:
ú desktop color laser printers,
ú high-end desktop ink jet printers,
ú wide-format printers,
ú mid-range color copiers,
ú mid-range digital black and white copiers,
ú production color copiers and
ú high-speed digital presses.
Customers
EFI has established relationships with leading copier and printer OEMs, in order to benefit from the OEMs' products, distribution channels and marketing resources. These OEMs include domestic and international manufacturers, distributors and sellers of digital copiers (both black-and-white and color), wide-format printers and desktop color printers. The Company works closely with the OEMs with the aim of developing solutions that incorporate leading technology and which are optimally suited to work in conjunction with such companies' products. OEMs that the Company sold products to in 1999 include, among others, Canon, ENCAD, Epson, Fuji-Xerox, Hewlett-Packard, Ikon Office Solutions, Konica, Minolta, Oce, Ricoh, Sharp, Toshiba and Xerox. Together, sales to Canon, Ricoh and Xerox accounted for approximately 68% of the Company's 1999 revenue, with sales to each of these customers accounting for more than 10% of the Company's revenue.
Competitors
The Company competes directly with other independent manufacturers of color servers, independent manufacturers of embedded solutions, copier manufacturers, printer manufacturers and others. The Company also faces competition from copier and printer manufacturers that offer internally developed server products or that incorporate internally developed embedded solutions or server features into their copiers and printers, thereby eliminating the need for the Company's products and limiting future opportunities for the Company. In addition, the Company faces competition from manufacturers of desktop color laser printers which do not utilize a controller (relying instead on host based processing of data) and which offer increasing speed and color capability.
Board of Directors and Executive Officers
Board Member Age Director Since
Gill Cogan 47 1992
General Partner of Weiss, Peck & Greer (investment company) and
General Partner of Weiss, Peck & Greer Venture Partners II, L.P.
(a venture capital firm).
Jean-Louis Gassee 56 1990
Chief Executive Officer, Be Inc. (an internet appliance
software platform company).
Guy Gecht 35 2000
Chief Executive Officer of the Company
James S. Greene 46 2000
President and CEO of perksatwork.com (an enterprise solution
software company)
Dan Maydan 64 1996
President, Applied Materials Inc. (a semiconductor manufacturing
equipment company).
Fred Rosenzweig 44 2000
President and Chief Operating Officer of the Company
Thomas I. Unterberg 69 1990
Managing Director, C.E. Unterberg Towbin (an investment banking firm).
Executive Officer Age Position
Guy Gecht 35 Chief Executive Officer
Fred Rosenzweig 44 President and Chief Operating Officer
Joe Cutts ?? Chief Financial Officer and Corporate Secretary
Janice Smith 36 Vice President, Marketing and Human Resources
Miscellaneous
Number of Employees: 758 full time employees, 213 in Sales, 91 in Management, 68 in Manufacturing.
Research and Development: Approximately $180 million invested in the past three years and roughly half of full time employees (386) were involved in R&D.
Manufacturing: EFI utilizes subcontractors to manufacture its products.
Growth Initiatives
Wireless Fiery. Developing mobile Fieries, which are connected to wireless LANs and are utilized as routers for other wireless devices and printers. Current EFI technology is able to achieve distances of up to 300 feet.
Reduced Chipsets. In an effort to continue reduce embedded technology price points, the company is researching and deploying the latest technology in ASIC design (i.e. system-on-a-chip). Already the number of ASICs per board has been cut by 25%. This initiative will help the company further penetrate the low-end laser and ink jet markets.
Professional Services. A Fee for service consulting business that will help customers understand their printing needs, assess current system needs and implement new technology platforms.
Core Products. Recent and expected announcements associated with both high-end black-and-white devices (Danka and Ricoh) and color controllers (Xerox).
Valuation
Based on EPS Growth and historical P/E multiple, EFI looks to be undervalued. The chart above best-fits the companies estimated EPS to its stock price. Based on this relationship the stock price should trade in the mid $40 range (note the chart is still estimating FY2000 EPS of over $2.00. Plugging in the revised $1.70 roughly equates to $45 per share).
In addition, using the P/E multiple and EPS growth model, an expected value of $40 per share is calculated based on a P/E range of 10.0x to 30.0x and an EPS growth rate range of 15% to 25%.
Finally, based on a discounted free cashflow basis, the valuation came in at roughly $52.50 per share based on operating cashflow growing in a range from 8% to 30% and capital expenditures growing in a range of 4% to 60%.
Averaging the three above calculations results in an estimated value of $45 per share.
Applying a 20% discount to account for a relatively young executive team and a concentrated customer base results in a value of roughly $35 per share. |
