To: Bill johnson1 who wrote (2605 ) 7/14/1998 6:07:00 PM From: Beltropolis Boy Read Replies (1) | Respond to
the clowns look like they may be bracing to dump. fwiw.Innovex's review What caused us to buy it? Innovex is a small company that leads its industry and has excellent profit margins. Like KLA-Tencor (Nadsaq: KLAC), the stock has had a strong decade, rising 43% annualized over the past five years alone. Again like KLA, though, it appears so far that the Fool Port bought "late." We bought Innovex, though, because we knew the company and because the disk drive industry was in a slump, thereby presenting a potential long-term opportunity to profit on the growth of the industry through a strong industry player. The Innovex buy report has details. Innovex commands 70% of its disk drive niche and has had 17% to 22% margins, and had a market-beating growth rate. It was trading at an attractive discount to that growth rate when we bought it. What has happened since buying? Recognizing the cyclical nature of disk drives, we only sank $9,000 into this company, but that doesn't lessen the pain. To date, Innovex is the worst performer in the port, down over 45%. The industry's woes proved serious, and on top of that, Innovex is currently ramping to a new technology. Our company is in a battle with Hutchinson Technology (Nasdaq: HTCH), a battle that management thinks it can win by offering all the advantages of the competition at a lower price. Until orders for Innovex's new HIF technology increase, though, revenues will likely remain flat or decline and profit margins might continue to slip. It is a credit to the company, however, that it has remained profitable (one of the few disk drive firms to do so) during the past year of turmoil. Decreasing earnings estimates led to a lower stock price, but at least Innovex's balance sheet and shareholders equity have grown stronger. What could cause us to sell it? With a book value of nearly $7 per share, Innovex's $14 stock doesn't seem very expensive. It trades at 10 times the earnings estimate fourteen months out (which is a guess), and the company aims to grow earnings 20% annually. With management moving to coinciding businesses (like semiconductor-packaging), a 20% growth rate could be very possible if the disk drive industry grows on par with PCs at about 14% annually. We will sell the stock if it ever appears that Innovex is losing a technology battle with competitors (I don't believe this is the case now -- INVX has the low cost solution); or if we find something better and need to raise money; or if Innovex can't find a way to grow earnings enough to merit a rising stock price. We'll also consider selling when the industry finally does rebound if we see a substantial and sustained rise in Innovex shares. Rebounds can be explosive. fool.com
