Robert Humphreys comments updated: (Seem to contain alot of the same info published on Monday.
Fri Sep 22 13:44:10 2000
(FIRST CALL) RHCO: Optimal Robotics: Making Consumers' Lives Easier
RHCO: Optimal Robotics: Making Consumers' Lives Easier
01:44pm EDT 22-Sep-00 Robinson-Humphrey (SMITH) OPMR
--SUMMARY-------------------------------------------------------------------
We reiterate our Buy (1S) rating on
Optimal Robotics and 12-month price
target of $50.
--OPINION-------------------------------------------------------------------
Making Consumers' Lives Easier
OPMR - $38 5/8, (09/18/00)
BUY (1S), 12-Mo. Target $50
* We rate Optimal Robotics a strong Buy with a $50 12-month price
target.
* Optimal's automatic checkout system, U-ScanR, has received overwhelming
acceptance from consumers and retailers.
* Importantly, after visiting OPMR's facility in Plattsburgh, New York, we
are confident it is on track to bring production in-house. OPMR's
facility is fully staffed, and it has mapped out and practiced the entire
assembly process in detail.
* OPMR's U-Scan carousel product is performing extremely well, and has
significant potential, in our view. Early statistics from pilot stores
and first-hand observation have reinforced our enthusiasm for this
product.
* We believe OPMR is in the final testing phase with a major non-grocery
specialty retailer. While it is still in its infancy, we think this and
other relationships could develop into significant sources of growth over
time for OPMR.
Profile
Montreal-based Optimal Robotics is a designer, manufacturer, and marketer
of automated checkout systems for retailers. The systems are placed near
the exit of a store and usually replace two to three regular, manned
checkouts. These systems result in substantial savings to the retailer
from reduced labor expenses, reduced loss from theft, and enhanced
customer flow, improving overall customer satisfaction while generating
significant financial returns. The key, in our view, to the success of
the U-ScanR system is its ease of use and convenience. Consumers like to
have a feeling of control, a need U-ScanR satisfies by enabling the
consumer to alter the speed of their transaction and avoid interaction
with store personnel. Further, the U-ScanR system accommodates all
different types of payments, including cash and coins, debit cards, credit
cards, and checks, and it also allows for the use of coupons. The company
currently markets three products: U-Scan SoloR, with capacity for one to
two bags worth of items, U-Scan ExpressR, with capacity for three bags,
and U-Scan CarouselR, with capacity for six bags. Each system uses IBM
PC-based architecture and is programmed to interface with the retailer's
POS system. Also, Optimal has the ability to monitor every aspect of each
of its systems remotely from its headquarters in Montreal, where an
extensive call center exists to detect and solve problems and dispatch
service personnel.
Investment Thesis
OPMR has secured important relationships with numerous large retailers
that should serve as a platform for future growth. For retailers, the
financial benefits of Optimal's U-ScanR system and the consumer acceptance
its system has achieved collectively provide a powerful incentive to roll
out the system throughout their footprint. Given that Optimal is in the
early phase of this rollout, and that its system is attractive to
non-grocery retailers as well, we think the company has a substantial
amount of growth ahead of it. Accordingly, we estimate Optimal has
potential to grow revenue 50% or better annually for several years as it
penetrates both the grocery and non-grocery retailer markets. This rapid
revenue growth, coupled with the cost savings the company should realize
from internalizing production, should translate into significant margin
expansion and earnings growth. We are forecasting earnings per share
growth of at least 50% compounded annually over the next five years.
Progress on Key Initiatives
We recently visited the company's production facility in Plattsburgh, New
York, just south of the Canadian - U.S. border. It is clear to us that
the company is preparing adequately for the transition to internal
production. While actual production for unit shipments in 2001 will not
commence until October, OPMR has been conducting numerous, thorough trial
runs to hone procedures. Further, visiting the facility helped us
understand the simplicity of the production process. Each unit is
assembled from 15 components using simple hand tools. The company has
mapped out the exact process flow from receiving the components to
assembly to quality and assurance testing to certification. Initially,
the company will run one shift, staffing for which is virtually complete.
In summary, we believe the company is well prepared for the
transition.
The company's new U-Scan CarouselR product (an advanced version of OPMR's
U-Scan ExpressR system that accommodates six grocery bags on a rotating
carousel vs. two for Express) is performing extremely well. We observed a
U-Scan CarouselR in action at a Kroger in Atlanta. This particular
Carousel unit was actually part of a system with three Express units.
However, it occupies only a slightly larger amount of floor space than an
Express, yet has three times the capacity. The unit is very easy to use
and we observed a wide range of people using it: young and old, male and
female. Importantly, the entire U-ScanR system (three Express' and one
Carousel) was used much more by customers than the regular checkout aisles
or the manned express lane. In fact, we estimate 70%-75% of the total
transactions during our observation period took place at the U-Scan
system. Also, the company has measured stores where nearly 60% of total
transactions were U-Scan CarouselR transactions. These usage rates,
coupled with our own observations, confirm that OPMR's products are
gaining consumer acceptance at an accelerating rate and that they have
substantial potential. Given that Carousel units do not occupy a
significantly greater amount of space, yet have three times the capacity
of an Express unit, we believe it will be an ideal "next generation"
upgrade to U-Scan ExpressR customers. Over time, we believe this will
help drive margins higher because the Carousel is a slightly premium
priced product.
Key points going forward
We believe the company is in the final testing phase to install its system
in a major non-grocery, specialty retailer. This retailer has already
bought into the concept, the focus now from OPMR's standpoint is on
integrating its system with the retailer's POS system. The U-ScanR system
is clearly adaptable to numerous venues outside of pure grocery stores,
and we think this will be an substantial source for growth in years to
come.
We have initiated a 2001 EPS estimate of $0.95. This estimate projects
880 units installed, or total revenue of $92.3 million, including $8.7
million for development and maintenance fees. More importantly, our
estimate includes a 12 percentage point increase in gross margin to 36.6%.
Commencing in January, 2001, the company will begin shipping product
assembled in its own facility. This will have an immediate and
substantial positive impact on gross margin. While we have modeled 36.6%,
we think the effect can be even greater over time. Therefore, we believe
there is upside to our 2001 estimate as gross margin benefits from
internal production. The ultimate benefit to EPS from this incremental
upside, however, will depend on the extent to which the company uses this
margin "windfall" to reinvest in support for growth going forward.
Valuation Guy |
