For Adaptec, "Scuzzy" Spells Success
By Eric C. Fleming
Adaptec's "scuzzy" past is making it sexy again.
No, not scuzzy as in grungy, but as in techies' pet name for SCSI (Small Computer System Interface). That technology is used in personal computers and servers to link disk drives to computer networks and peripheral devices like scanners.
Investors hungry for anything storage-related after September 11 bid up Adaptec shares by 60%, to a recent close at 11.40, from its 52-week low of 7.20 on September 21. And the stock rose 46% in 2001, while the Nasdaq Composite index lost 15% last year.
The reason: Adaptec's core business is doing fine. Late last month, it beat the three-analyst consensus estimate of a nickel a share, earning eight cents in its third fiscal quarter that ended December 31, as sales slipped to $105 million, from $160 million.
The Milpitas, Calif. company got about 80% of its 2001 sales of chips, controllers and adapters from the storage software business, selling to the likes of IBM, EMC and Dell Computer. The rest came from products for desktops and storage networking.
Adaptec, whose market capitalization is $1.2 billion, is particularly well-positioned for the next big trend in data storage -- networking.
After years of building vast systems to store information, corporations now want to move data storage from the server or mainframe to the network itself -- and they don't want to spend too much money in the process.
That's why market research firm IDC forecasts that storage devices attached directly to the network (like servers) will shrink to 35% of the storage market in 2005, from 80% in 2000.
Adaptec should gain from the trend to storage networking through iSCSI, a form of "scuzzy" based on Internet Protocol (IP), which is cheaper than other technologies and can help networks extend easily around the world.
This promising business is expected to take off in the fiscal year ending March 31, 2003, reaping an estimated $37 million, or 7.9% of Adaptec's sales, from only $13.1 million, or 3.1% of revenue, in the current fiscal year, says Paul Mansky, an analyst at CIBC World Markets, who rates Adaptec a Buy. (Mansky says he doesn't own the stock, and CIBC doesn't do investment banking for Adaptec.)
From there, iSCSI is expected to keep growing at a double-digit rate for Adaptec, says Lawrence Creatura, portfolio manager at the Turner Small Cap Value Fund, whose $500-million fund has less than 1% of its assets in Adaptec stock.
On the desktop front, Adaptec, with a 400-million-unit installed base, hopes to get consumers to upgrade to faster, more profitable connectors that can help them burn CDs and edit digital photos.
To be sure, Adaptec has been hurt by weak demand for PCs and servers, since its wares are used in both. That's partly why the stock price has slid 37% from its 52-week high of 18.49 in January.
But last month, Sun Microsystems, an Adaptec customer, indicated that sales were beginning to pick up again after several quarters of decline.
The stock has had its ups and downs, too. On Wednesday the shares fell 15%, or 2.02, on volume six times its daily average, after Adaptec announced plans for a $250-million offering of convertible bonds.
Investors worried that current holders of the company's 106 million outstanding shares could face dilution and that arbitrageurs might buy the notes while shorting the stock. So, Adaptec ended up selling only $225 million of the bonds Thursday at a conversion price into common stock of $15.31, and the bonds can't be called for three years.
Still, "[the offering] does not change the fundamental value of the company," says Bob Straus, portfolio manager of the Icon Information Technology Fund, which holds 3.5% of its assets in Adaptec. Strauss pegs Adaptec's intrinsic worth at 17.50.
David Katz, who runs the Matrix Advisors Value Fund, which has 3% of its assets in Adaptec, is buying the stock at current levels.
"[The offering] is not a bad thing; it just caught the market wildly off-guard," says Katz.
But what's all the money for, considering Adaptec already has $605 million in cash its coffers? In its press release, the company cited "general corporate purposes," including "potential acquisitions." Adaptec officials were unavailable to comment before deadline.
Creatura says an acquisition of a small, private company would be a smart move. (Last year Adaptec acquired Platys, a provider of iSCSI.) Such early-stage technology firms could spur growth without adding too much debt to Adaptec's balance sheet, he adds.
Adaptec now trades at about twice its book value of $6.00 per share. That's a discount to its ten-year median of 3.3 times book, according to Thomson Financial/Baseline.
Adaptec also sold at only three times trailing 12-month sales, versus 11 times for competitors QLogic and 12 times for Emulex.
Its stock changes hands at 40 times the 28 cents a share consensus for its fiscal 2002, ending March 31, and at 27 times the 42-cent consensus for fiscal 2003, according to Thomson Financial/First Call. That's roughly in line with Adaptec's anticipated annual long-term growth earnings growth rate of 35%.
Of course, the economy may not recover as expected, and technology spending may remain anemic. Also, iSCSI technology may not become as popular as Adaptec's fans expect.
Yet, with plenty of cash, a strong balance sheet and bright prospects for its technologies, Adaptec may find that "scuzzy" translates into "profits" for shareholders. |
