fool.com
Article at bottom of page! I also coppied but it didnt come out too good. Sorry.
Stock prices can be deceiving. Any investor who has found her way to this column
knows that a $10 stock isn't necessarily or even probably 10 times cheaper than
another stock selling for $100. Yet, investors caught up in a good story on a
low-priced stock often don't run the basic valuations that would reinforce such
knowledge. The low price alone seems to promise massive capital appreciation.
One of the best stories of late has been the resurgence in shares of SYQUEST
TECHNOLOGY (Nasdaq: SYQT) (N) (S), the veteran Fremont, California removable
disk drive manufacturer perhaps better known as the company crushed by the
success of IOMEGA's (NYSE: IOM) (N) (S) Zip drive. In mid-August of 1995, the
upstart Zip was only beginning to fight it out with market leader SyQuest. At that
point, both stocks had risen substantially over just a few months, with Iomega at a
split-adjusted $4 a share and SyQuest at $19 5/8, its highest level since February
1993. Over two years later, Iomega stands at $28 3/4 a share, while SyQuest has gone
down down down, nearly perishing more than once. During this period the firm has
lost over $200 million, seen its founder ousted, and suffered through the wilderness
as new management worked to stave off bankruptcy by hustling up more money and
striking elaborate equity-for-debt swaps with suppliers.
The result has been surprising. The company that many presumed dead is still
kicking and has recently launched an attractive new high-profile ad campaign with
placements in The New York Times and Business Week. After trading as low as $1
11/16 this past June, the stock had recovered to $3 by early October. About that
time, HD Brous & Co. analyst Howard Rosencrans upgraded the company from
"neutral" to "speculative buy," pushing the stock to $4 a share. When his upgrade
was announced October 10, feverish buying sent the shares soaring $1.41 to $5.69.
Rosencrans said SyQuest would soon launch a scaled down version of its 1.5
gigabyte SyJet drive. "We believe that investors may begin to envision a very
compelling turnaround starting to materialize at SyQuest," he said, citing the new
offering, a stable financial position, and the new management team. Rosencrans
suggested that investors might draw an analogy between SyQuest's re-emergence
and "the Iomega story -- a seemingly moribund company being revitalized by a
proven management team possibly introducing a (potentially) hot product line."
Rosencrans himself said the "harsh reality" was that SyQuest faces a "difficult uphill
battle" since Iomega's installed base of Zip and Jaz drives "may create a barrier to
the acceptance of SyQuest's products." Nonetheless, he suggested that in the short
term, the "Iomega fantasy" was liable to induce a SyQuest feeding frenzy.
The new SyQuest is now here. On Monday, the company introduced its 1 gigabyte
SparQ drive to sell for $199, with cartridges running 3 for $99. At least in theory, this
product at this price point could put pressure on Iomega's 1.0 gigabyte Jaz drive.
Plus, computer users comparing a $99 to $129 100 megabyte Zip drive to the SparQ
may be induced to buy up. The company's press release includes laudatory
comments from execs at major computer retailers COMPUSA (NYSE: CPU) (N) (S)
and INGRAM MICRO (NYSE:IM) (N) (S). Plus, storage analyst Crawford del Prete
of respected research outfit International Data Corp. celebrated SparQ's low price
point, noting that "SyQuest is introducing a product that could significantly
transform what has been a niche market."
SparQ may revive SyQuest's business, though even a successful rollout may not
represent a major threat to Iomega, which has been churning out impressive
earnings and is poised for its own new product announcement at the upcoming
COMDEX show. Still, it's worth considering what kind of results SyQuest will need
to justify its current price of $4 a share. For comparison, consider Iomega's valuation
at $30 a share, the high end of its current trading range. Iomega's market cap, based
on 137 million shares, is $4,110 million. Subtract the $166 million in cash and add $50
million in debt, and we get an enterprise value of $3,994 million. With $99.5 million in
trailing net profit, Iomega trades at 39.6 times earnings. With $1,509.3 in trailing
revenue, it trades at 2.65 times sales. Though the bulls and bears will fight over
Iomega, this is clearly as much as investors are willing to pay today for what is
unquestionably the premier player in the removable storage space.
With SyQuest shares 80% off their four-year high, surely the stock has more upside
potential. No doubt, that's what some speculative buyers have been thinking. Yet
SyQuest has perhaps never been so richly valued. In August 1995 when the stock
traded up to $19 5/8, the company's 11.06 million shares and $29.7 million in cash
gave it an enterprise value of about $187 million, or 0.62 times FY95's unprofitable
$299.5 million in sales. At the high of $28 1/2 achieved early in FY94, the company
had an enterprise value of $30.6 million, or 1.46 times the trailing FY93 sales and 19.8
times the $15.2 million in trailing earnings. However, even at just $4 a share, SyQuest
is now altogether more expensive than it was at either of these two previous highs.
The problem is dilution. To avoid being delisted by Nasdaq and to stay afloat,
SyQuest's new management concocted one financing deal after another. The
numbers of shares cranked out is staggering. On June 30,1996, SyQuest had 11.5
million shares outstanding. Today, SyQuest shareholders voted on a proposal to
increase the number of authorized common shares from 120 million to 240 million!
Why? According to the proxy, the company has either "issued or reserved for
issuance" most of the currently authorized 120 million shares, and management
wants flexibility in addressing future corporate needs. The proxy tallies the score
this way as of September 12:
Common stock outstanding 56.8 mil. shares
Common reserved for...
...conv. of preferred stock 14.1 mil. shares
...exercise of warrants 35.9 mil. shares
...employee stock options 4.5 mil. shares
...other commitments 0.2 mil. shares
Since this proxy was filed, SyQuest has issued 10 million more shares of convertible
preferred stock (at $1 a share) and warrants for another 7 million shares with an
average maximum exercise price of $3.24. Including these shares along with others
issued or issuable, the financial tally now looks like this:
Common stock outstanding/issuable 80.9 mil.
Common issuable upon conv. of warrants 43.5 mil.
(max. average price: $3 per share)
Common issuable under employee option plan 4.5 mil.
(average price: $1.40 per share)
Ignoring the employee options for now, it appears that SyQuest is well on its way to
having 123.2 million shares. The company does stand to collect about $130 million if
all of the warrants are exercised. Still, the drive maker now has an effective market
cap of $492.8 million. Subtract the $7 million cash on hand September 30 (the end of
fiscal '97) plus the $10 million raised in October and the $130 due from the warrants,
and SyQuest has an enterprise value of $346 million. For the year, the firm reported
sales of $122.7 million and an operating loss of $68.7 million (versus a loss of $136.7
million in FY96).
Assuming SyQuest deserves even the loftiest recent Iomega multiples and could
deliver comparable margins (both big assumptions), the company would need about
$8.7 million in net profits on $131 million in revenue. Given the continued challenges
facing SyQuest and the ones already met by Iomega, it appears that SyQuest
investors are betting on a truly remarkable performance going forward. |
