Robert Baird's initiation of coverage:
B3: OPMR: INITIATE COVERAGE WITH A STRONG BUY RATING AND A $47 PRICE TARGET
09:03am EDT 30-Aug-00 Robert W. Baird Intl (Reik Read 414-298-1030) OPMR
BAIRD/ BAIRD/ BAIRD/ BAIRD/ BAIRD/ BAIRD/ BAIRD/
Optimal Robotics Corporation
August 30, 2000
OPMR: INITIATE COVERAGE WITH A STRONG BUY RATING AND A $47 PRICE TARGET
PART 1 OF 2
52 Week Fiscal ----- EPS ----- P/E Ratio Shares
Price* Range Year 1999A2000E 2001E 2000E 2001E Div Yield (Mils)
32.00 49 - 12 DEC 0.07 0.31 0.86 103.2 37.2 0.0 0.0 13.6
*Prior Day's Close
Current Rating
Rating: Strong Buy S&P 500: 1,509.84
Suitability: Higher Risk Price Target: $ 47
* We expect Optimal Robotics to grow its top line 50%, and EPS in excess
of 50% over the next three years.
* Optimal Robotic's U-Scan system has the No. 1 position in self-
checkout, with roughly 65% market share.
* We believe U-Scan's strong labor-saving value proposition should fuel
a significant increase in the penetration rate, which translates into
average annual growth of over 50%. We estimate the overall potential market
for self-checkout to be over $2 billion.
* Optimal's strong relationships help the company to further penetrate
its accounts since retailers tend to standardize their technology platforms
once proof of concept has been established. Optimal Robotics has existing
relationships with Kroger, Maijer, A&P, Ahold and Wal-Mart; combined, these
retailers have over 10,000 locations.
* Optimal Robotics has a backlog of over 200 systems, which provides
visibility. We expect a new round of orders in late fall to boost the
backlog. Retailers tend to cluster their technology orders in the fourth
quarter, creating a sizable backlog. Each of the major retailers are
currently spending more on capital investments than a year ago.
* The tight labor market continues to act as a catalyst as self-checkout
is capable of saving 150 labor hours per week.
* Wal-Mart continues to pilot the U-Scan system; a full roll-out could
lead to significant upside, in our view. We believe the concept of self-
checkout is in its early stages, and that a mass adaptation by a large
retailer may lead to very rapid growth.
* Management believes insourcing assembly will improve 2001 operating
margins by as many as 1000 basis points. In addition, we believe that
increased scale and better installation practices will also lead to
improved margins.
* Optimal Robotics is nearly 35% off of its 52-week high of $49 set this
past April. Based on other automated collection comparables, we have
targeted a PE of 55x. Combined with our 2001 EPS estimate of $0.86, we
arrive at a price target of $47.
Top Market Share, Strong Position
Optimal Robotics is recognized as a pioneer in self-checkout. We believe
Optimal Robotics has strong competitive advantages that will allow the
company to capitalize on the large, underpenetrated market opportunity that
exists in self-checkout. We base our assessment on the following:
* Largest install base in U.S. market. Optimal Robotics has roughly 650
U-Scan installations in 30 states within the U.S., giving the company the
No. 1 market share. We estimate Optimal's market share to be roughly 65%.
This large install base provides Optimal with strong competitive
advantages, including identifiable leadership, strong brand equity,
superior product knowledge and proof of product/concept.
* Well-established relationships with large retailers. Optimal Robotics'
retail focus and self-checkout track record has led to existing, solid
relationships with target retail accounts in grocery and mass
merchandising. These strong relationships help Optimal to further penetrate
its target accounts, particularly since retailers tend to standardize their
technology purchases once proof of concept and proof of product have been
established. Optimal Robotics has existing relationships with Kroger (over
250 systems installed), Meijer (over 100 systems installed), A&P (over 25
systems installed), Ahold (over 5 systems installed) and Wal-Mart (20
systems installed). Combined, this group has over 10,000 store locations.
* Strong history of design innovation. Optimal Robotics has been
designing self-checkout systems for six years, and is well positioned to
add value through customization and new development. Recent product
development has created U-Scan variations, including the Solo for small
store applications and the Carousel for super center store applications.
* Proprietary knowledge leads to a superior product. Optimal Robotics'
large install base, established relationships, and product development
capability have generated significant, proprietary knowledge in self-
checkout. Optimal has effectively used that knowledge to provide strong
value to its customers, with system capabilities that include alcohol
purchases, security, universal payment capability and checkout marketing.
No other available system appears to carry the same level of express
functionality as the U-Scan system.
* Strong backlog provides stability, visibility. Optimal Robotics has a
backlog of over 200 systems, which provides a strong basis for stability.
We believe the backlog will substantially increase in late fall as
retailers tend to set their technology purchasing requirements in November
or December.
Strong Value Proposition Leads to Sizable Opportunity
Strong Value Proposition
With small profit margins (net profits are typically less than 1.5%),
retailers are always driven to find new ways to drive out costs. An
increasing number of retailers are finding that investment in self-checkout
equipment can significantly reduce labor costs and labor dependence and,
therefore, has a strong value proposition, with payback in as little as
nine months. The self-checkout solution is particularly applicable with
today's tight labor market as it can reduce labor requirements of
approximately two full-time checkout workers per shift. A Kroger study,
which accounted for costs associated with the removal of old lanes, the
cost of the new self-checkout system, including installation, found that
the return on investment of the U-Scan system was 30% to 32%. In addition
to the cost savings, many customers achieve a high degree of customer
satisfaction. An Optimal study found that 74% of surveyed customers
believed that self-checkout improved the overall checkout process.
Large Available Market, Low Penetration
The large number of supermarkets and mass merchandising retail stores in
North America creates an estimated market opportunity for self-checkout of
nearly $2.2 billion. We estimate that the two types of retailers have
23,000 qualified stores (store sales greater than $12 million annually) in
North America. Our data suggests that approximately 750 of these stores
used self-checkout in 1999, which translates into overall market
penetration of less than 5%.
Strong Growth Dynamics
We expect strong growth to be generated as the benefits of self-checkout's
value proposition are discovered, causing market penetration to increase.
Our data indicates that the 1999 penetration rate of 3.3% will increase to
50% by 2004, which will drive 1999 total market revenue from $57.0 million
to $473.6 million by 2004. This increase translates into average annual
growth for the self-checkout market of 52.7%.
Incremental Revenue Sources
In addition to the rapid growth of self-checkout systems, we see additional
revenue opportunities for the self-checkout market, including e-commerce,
screen marketing, and bonus programs. With the significant amount of time
customers spend in front of the U-Scan video touchscreen, a solid
opportunity exists for advertising and in-store or e-delivery promotions
(including choice of fulfillment). We believe these revenue opportunities
are in the early stages, and present potential upside to estimates.
Recent Results
* Revenue - Revenue for the second quarter of 2000 reached $16.1
million, growing 129.6% from a year ago. Unit sales increased to 156
Express units versus 68 a year ago and 115 in the first quarter of 2000. In
addition, the new Carousel product began shipping in the second quarter.
* Gross Margin - Gross margin of 25.8% improved comparably by 460 basis
points, and up sequentially 90 basis points.
* Operating Margin - Operating margin of 7.1% increased comparably 390
basis points, and was up sequentially 80 basis points.
* Other - Interest income reached $1.2 million versus $0.2 million a
year ago.
* EPS reached $0.11 versus $0.05, an increase of 129.5%
CONTINUED ON PART 2 |
