OPMR: INITIATE COVERAGE WITH A STRONG BUY RATING AND A $47 PRICE TARGET
PART 2 OF 2
Estimates
Our EPS estimate for 2000 is $0.31, and our 2001 EPS estimate is $0.86,
which we base on the following:
* Revenue - We expect 2000 revenue to reach $59.2 million, growing 99.7%
over 1999. We estimate total unit sales to be 574 units, up from 288 in
1999. We forecast Optimal will sell 915 total systems in 2001, generating
revenue of $92.1 million.
* Gross Margin - We forecast a gross margin improvement in 2000 to 24.7%
from 20.8% in 1999. In our opinion, improving operating leverage and better
installation efficiency should account for the increase. We expect gross
margin to significantly increase in 2001 to 34.3% as Optimal insources
system assembly.
Operating Margin - We expect the 2000 operating margin will increase
580 basis points, to 5.1%, while we believe the 2001 operating margin will
increase to 17.2%.
* Other - The company no longer has any NOL Carryback/forward and,
therefore, we anticipate the company tax burden will be roughly 39% on a
going-forward basis. The March secondary has added significant cash to the
balance sheet. This additional cash should yield 2000 investment income of
$3.4 million versus $0.9 million in 1999. We expect investment income in
2001 to be $3.8 million.
Risks
Transferring Assembly Operations - In January of 2001, Optimal Robotics
will become responsible for the assembly of its self-checkout units.
Optimal has no previous assembly experience, and the transition could
hamper short-term results, particularly given the high product demand.
Optimal will have the advantage of ramping-up operations during the third
quarter of 2000.
Developing Market - The early results of U-Scan self-checkout are positive;
however, the market remains in its developmental stage. Retailers, which
have low margins, must believe in the self-checkout value proposition, or
they will not embrace the concept. Historically, other self-checkout
concepts have not always met expectations. We believe the U-Scan focus on
express (small order) checkout, combined with technological and process
improvements, provides the basis for a successful self-checkout system.
Competition from NCR and Productivity Solutions - NCR is a dominant
industry leader in providing retail point-of-sale solutions (along with
IBM). NCR has a self-checkout platform which could significantly challenge
U-Scan. However, to date, NCR has installed less than 20 systems, and has
not placed a significant focus on this market. Productivity Solutions
(PSI), a private company in Jacksonville, Florida, who developed the first
self-checkout system, also has position in the market, with over 250
installed systems. We believe that price competition may exist as these
players attempt to establish position (also selling to large retailers
which can exert price pressure); however, we also forecast the market
opportunity is large enough to support all three players.
Ability to Manage Rapid Growth - Optimal Robotics has experienced
significant growth since its inception, and we expect strong growth to
continue. Phases of strong growth are inherently difficult to manage, and
we believe Optimal is no exception. Management focus, maintaining customer
service and delivery can become strained, with poor execution the result.
Optimal's small operating base mitigates near-term risk.
Installation Capacity - The success of the U-Scan product line and
corresponding growth has begun to create an installation bottleneck as
service crews are at full utilization. We expect the company to continue to
build on its own service capabilities, and will increasingly employ third-
party assistance.
Conclusion
Thus far, we believe a handful of early adopters have driven the market. We
believe the strong value proposition, the current labor shortage, and the
competitive nature of retail will continue to act as catalysts in
generating mass acceptance of self-checkout, which potentially leads to a
period of accelerated growth. Given that potential, and the apparent market
size, we see significant opportunity over the next three to five years in
the self-checkout market.
Optimal Robotics is nearly 35% off of its 52-week high of $49 set this past
April. Optimal is lightly covered and we believe has a strong emerging
story. We believe Optimal Robotics' high growth prospects, large customer
potential, strong market position, improving profitability and strong
balance sheet will attract additional investor interest. We believe these
characteristics warrant Optimal trading similar to other strong players in
the automatic identification and collection space, which is at a slight
premium to its growth rate. To be conservative, we suggest a premium of
only 10%, which generates a target PE of 55x. Combined with our 2001 EPS
estimate of $0.86, we arrive at a price target of $47.
* Baird makes a market
Enjoy!
Valuation Guy/Obewon |
