Here's an article on RDRT you may be interested in:
note that Herb Greenberg is the biggest bear out there
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Why So Much Smart Money Is So High on Read-Rite
By Herb Greenberg
Senior Columnist
Originally posted at 6:30 AM ET 9/26/00 on RealMoney.com
Feeling benevolent, so let's get bullish:
Reading right: As I've written in RealMoney.com's Columnist Conversation, the one stock quite a few of my smartest sources are yapping about is Read-Rite (RDRT:Nasdaq - news), the (until very recently) long-forgotten maker of heads for disk drives. The only reason I take it seriously is because of the variety of investors in the stock (from seasoned and savvy traders to some of the most-dogged researchers I know).
Most of the sizzle surrounding the company in recent weeks has been tied to the launch of a new division called Scion Photonics, which is developing optical wafers for use in the fiber-optic networks, and which was initially funded with $25 mil from Tyco Ventures and Roger McNamee's Integral Capital, which got a quarter of the company in return.
But that's only part of the story:
According to Scott Turkel of TCM Partners, who has had his share of hits and misses in this column, and who also happens to be the only on-the-record holder among my sources, the company without Scion is worth about where it trades today, $10.50, or around 1 times sales. "They're completely sold out in their core business in the fourth quarter," he says, "and for the first time, they have pricing power." (One reason is that disk drives are no longer sold mostly for PCs; they've become a staple in storage networks.)
Scion, meanwhile, is currently valued at around $100 million (based on Tyco/Integral's 25% stake). "Chump change," says Turkel. That's because the valuation is without even having a marketable product; the first wafer isn't expected to hit the market until next year (which, I should point out, is why some skeptics are, uh, skeptical).
But another very sharp manager I know, who is often short stocks, said he saw Read-Rite at several recent conferences, and "I thought the story got better between Salomon Smith Barney and Banc of America, both on the optics side and on their base business. They actually showed a slide of the optical wafer prototype they had made; they said they are sampling product with several customers. They said, Our customers have said, 'If you can make them, we'll buy them.' In other words, the move to optical is less theoretical than it was a month ago."
What's more, according to this money manger, who is great at spotting nuances, "They went from saying, 'We'll be break-even cash flow in Q-4 from core businesses,' to saying, 'We are on allocation and we may actually make money in Q4' from the core business.' "
Based on that, Turkel (who first bought the stock when it was $4 not long ago) thinks he now owns a $10 stock that is worth $25.
P.S.: Read-Rite recently paid the first installment of interest on a convertible bond with cash, rather than stock, which was an alternative. (The cash came from the State of Wisconsin Investment Board, already a large Read-Rite investor.) Translation to some investors: The only reason the state paid with cash is because it thinks the stock is going higher. Or, put another way, Wisconsin, which already owns a 20% stake, wouldn't have sunk in even more cash if it didn't think it would make a decent return. (Did I really write something that glowing? Must be some kind of a market top!)
Take that!: Two years ago, I wrote a column headlined, "Why One Mutual Fund Is Short PMI and Long MGIC."
It was referring to PMI Group (PMI:NYSE - news) and MGIC Investment Corp. (MTG:NYSE - news), and one mutual fund manager's assessment. As Glen Corso, who heads PMI's investor relations department recalls, "You said he looked at return on equity, free cash flow, reserves for losses, policy portfolio growth and deferred policy acquisition costs as factors in his decision to sell our stock short, in the expectation that we would miss the analysts' earnings forecast. I thought it might be useful and instructive for me to update you on how our company has fared with respect to those factors over the past eight quarters since your column was published."
Sure Glen, go ahead:
"Our return on equity was 19% in second quarter 2000, while our earnings per share growth was 33% when compared to second quarter 2000. Cash earnings, at $1.49 per share in second quarter 2000, were 4 cents higher than reported earnings of $1.45. Our insurance in force portfolio grew 10% compared to the second quarter a year ago. Our primary reserves, at June 30, 2000, were $16 million higher than primary reserves at June 30, 1999, even though the delinquency rate at June 30, 2000, had declined to 1.93% from 1.99% at June 30, 1999. The deferred acquisition costs asset on our balance sheet declined to $63.8 million at June 30, 2000, from $69.2 million at the same date a year ago. For the past year, and ever since we became a public company, we have met, or beat, the analysts' consensus per-share earnings estimates. On Sept. 6, 2000, we issued earnings guidance indicating that we expected earnings per share growth of 26-28% in 2000, and 17-19% for 2001."
Great, though your stock and MGIC's both sank about six months later ... before rebounding in all their glory! Best of luck and thanks for doing what most companies don't: rubbing it in my face when it's deserved. |
