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Technology Stocks : Adaptec (ADPT) -- Ignore unavailable to you. Want to Upgrade?

To: Tom M who wrote (1993)	5/2/1998 11:06:00 AM
From: Doug	Respond to of 5944

Tom: I understand your fears. To restore confidence, we need answers to the following: a: Since Rev was down by 23%,what is the rev /income at Symbios. b: Since Income at ADPT will be down thruout 98/99, how is the Financing of Symbios going to affect future earnings. c: What is the growth of the Ultra DMA bus vrs the SCII and fast SCII. d: Why is revenue declining.? Are competitors gaining on ADPT's market share. I hope some one knowledgable will response.

To: Tom M who wrote (1993)	5/10/1998 12:54:00 PM
From: Mark	Read Replies (3) \| Respond to of 5944

Tom, Thanks for your further thoughts. I liked the realism in your earlier post (which brought me to this thread for a number of weeks) and I once again congratulate you on the "balance" in this one. I've been away from ADPT for a few weeks with a bit of a crisis in APSG which took up my recent time - (if you are interested checkout - Message 4393087 ) I have also just finished reading Ken Fisher's "Super Stocks" which has helped my thinking a lot. (I was sufficiently inspired that I've also just bought his pa's book "Common Stocks for Uncommon Profits"). For what it's worth, here are some of my current thoughts on ADPT (not particularly refined). The last quarter produced $204m in sales revenues. This is approx 25% lower than the average sales rate of the previous 12months. At a share price of $20, ADPT has a market capitalisation of about $2.3B. Extrapolating the current sales rate for a full year implies a revenue level of $816m. Therefore the company is currently valued at nearly 3x sales. (PSR = 3). This is much too high for a company with declining sales/earnings. Historically (over the last 5 years), ADPT has traded on a PSR of between 2 and 4. It has had high profit margins and CONSISTANT earnings growth, and so deserved a high ratio. For a company of ADPT's size I would guess a "neutral" PSR of around 1.5 (AS LONG AS IT CAN COMMAND HIGH PROFIT MARGINS). In a bull market lets say this neutral PSR figure becomes 2 (i.e. a 33% premium). The stock would then be a strong buy at half this (i.e. at 1), and a strong sell at twice this (i.e. at 4). On this basis the stock is therefore looking like a sell. (To put this in "the more conventional way" the stock is currently trading on an extrapolated PE of >20, whilst it's growth is in decline, it's market is uncertain and it has major integration issues looming). A couple of other things need to be considered - 1) has ADPT lost the right to command high profit margins ? An earlier post suggested that it has lost the patents on it's SCSI technology, which were probably a competitive advantage in this market. In addition, whilst ADPT enjoys an (increasingly ?) dominant market share in the SCSI market, are further declines in the size of this market inevitable ? I have particularly enjoyed Torben's recent contributions and appreciate his detailed/balanced technical knowledge. Maybe he (and others) could help to answer the following - Q1. What will be the best HDD interfaces in the near future for - a) inside the box where cost is an issue ? b) inside the box where cost is not an issue ? c) inside the box if increased configurability is required ? d) outside the box where cost is an issue ? e) outside the box where cost is not an issue ? Q2. Which of the above will be the largest markets ? I actually suspect that ADPT will not be enjoying the same profit margins in the next 12mos+ that they have in the past. The last 2 quarters showed their margins at 15% and 11%, down sequentially from highs of above 20%. On this basis they do not deserve a "neutral" PSR as high as 2 (in a bull market). I'd suggest that something like 1.2 was more realistic (though let's make this 1.6 for a bull market). On this basis THE STOCK AT $20 IS ALMOST LOOKING LIKE A STRONG SELL (i.e. is nearly 2x the neutral PSR). 2) ADPT has a cash mountain, which it needs to do something with. As cash, its value is minimal. Let us assume that the FTC does not intervene in the Symbios acquisition. (There must be some risk that it will). Let us further assume that Symbios presently has a run-rate revenue of $550m (WAG ! - we suspect it was a lot higher than this but it must be subject to the same market pressures as ADPT). The combined entity "ADIOS" (as some wag proposed earlier !) would have sales revenues of around $1.35B. According to details of the proposed financing, there will be no stock dilution, so ADIOS will have the same number of shares. This gives it the same market capitalisation - $2.3B at $20. With the combined sales, the new entity would be trading at a PSR of 1.7. This is still slightly higher than the 1.6 "neutral" PSR (for a bull market), and quite a bit higher than the 1.2 PSR (for a neutral market). In both cases, there is no compelling justification to buy. As a combined entity, with increased market share and better economies of scale, the company should enjoy higher margins. However, if the SCSI market is falling apart........ So, even if ADIOS happens, the current price of $20 only represents neutral-ish value, and possibly looks over-priced. If the market corrects, then it will look over-priced. If the SCSI market declines, it will look over-priced. If they have significant integration issues with Symbios, it will look over-priced. To put this all in context, let us suppose that the following all happen - 1) the Symbios merger is allowed to proceed, 2) the Symbios merger happens smoothly, 3) the SCSI market doesn't quickly fall apart and other major sources of revenue appear, 4) the company ramps sales revenues up from the $1.35B level that I proposed, to $1.8B (that's a 33% gain), 5) the company commands reasonable profit margins again - let's say 15%, which is what it achieved in 1993, 1994 and 1996, 6) the number of shares stays the same, 7) the market again has sufficient confidence to award a PER of 18 (about the average PER for 1992 - 1996) On this basis, the earnings would be $270m. The EPS would be about $2.30, and the share price would be about $41. So, the proposition is - if I invest in ADPT today at $20, and ALL of the above happen, then at some point in the future I could double my investment. The questions you then have to ask are - A) Do I think it is likely that all 7 things will happen ? B) If so, when ? Personally, I think it's a bit much to expect all of the above to happen. I certainly think it won't do so for 2 years or more...... If that's true, then it's a pretty risky way to make a 40% per annum return. On this basis, I wouldn't buy at anywhere above $15. (So I am in agreement with you and Zeev, and maybe Slob was right). Mark