OT, partly: machine vision
from barron's; anyone have an opinion about them?:
July 20, 1998
Piercing Vision
By Rhonda Brammer
"Automate, emigrate or evaporate!" That corporate battle cry was ringing in the head of Joe Christenson when, in the mid-'Eighties, he left the University of Michigan, MBA in hand. Robots, machine vision-all that jazz-he was convinced was the wave of the future. No surprise, then, word of a venture-capital firm that planned "to replace the human eyeball and revolutionize manufacturing" sent Christenson hurrying off for Minneapolis to, as he tells it, practically insist PPT Vision give him a job.
"I was there only a year or two," sighs Christenson, now president of PPT, "and the bloom came off the rose." The hype -- and huge inflows of venture capital into the fledgling industry -- proved unavailing against a shakeout. Start-up after start-up went broke. Yet even today, the legacy of that flood of venture capital remains in the form of a hugely fragmented industry. According to the Automated Imaging Association, 70% of the estimated 200 companies in the $1 billion North American machine-vision market have less then $5 million in annual revenues.
More recently, machine-vision companies -- which nearly all count semiconductor and electronics firms among their major customers -- have been clobbered by troubles in Asia. Shares of a slew of these outfits -- Cognex, CyberOptics, Perceptron, Robotic Vision and Xrite -- are selling near their lows.
All of which intrigued us and made us wonder if this small and specialized field wasn't fertile territory for the bargain-hunting investor. For, in spite of rather violent ups and downs (typical of any business supplying the chip industry), demand for machine-vision equipment, from all indications, is vibrant and growing.
The biggest spur is the inexorable move to smaller and smaller electronic components. Another is the increasingly standard requirement for 100% inspection. Whether the company sells electronic connectors or pharmaceuticals, random inspection often no longer suffices. Every connection to the microprocessor must be checked. Every package of medicine must be properly sealed, dated and labeled. Machine-vision equipment -- essentially a cleverly linked camera, light and computer -- can often sharply cut manufacturing costs.
We first spotted PPT Vision on a computer screen and it appeared to have the makings of a genuine little growth stock selling at a rock-bottom price. To be sure, the company is small, with a market value under $40 million. It undeniably has some exposure to Asia, is at the beginning of a new product cycle (which has its risks) and, in the most recent quarter, lost money-though only a penny a share. And yes, it has disappointed investors. When sales growth stalled in '96, the stock plunged from a high of 19 and it has traded in the 6-to-10 range pretty much ever since.
But despite this unprepossessing stretch in its history, PPT has doughtily, quarter after quarter, widened its base of installed machines. In the six months ended April, for example, unit sales increased to 275 from 195 in the year-ago first half. Since inception, PPT has sold more than 2,300 machines.
The roster of buyers includes AMP, Abbott Labs, Chrysler, GM, Molex, Johnson & Johnson, Micron Technology, United Technologies, Siemens, 3M -- to name only a few. PPT supplies eight of the world's 10 largest connector manufacturers.
The core business is doing quite well. PPT's Asian sales are still remarkably brisk. Indeed, even with the transition to a new generation of digital machines, sales rose 19% in the recent quarter. Gross margins ran 60%.
So why did the company wind up the quarter in the red?
Because it spent an astonishing 24% of sales on R&D. Indeed, research outlays have been running about 20% of sales for quite a spell.
That effort, however, has begun bearing significant fruit. In September, PPT announced a new generation of completely digital machine-vision systems -- an industry first. These can send images at higher speeds over longer distances with less noise and, Christenson believes, could conceivably make analog vision systems obsolete in the space of a year.
The digital machines are now being shipped -- among the first buyers, pharmaceutical firms. Installations at electronics companies are slated before summer's end.
Potentially even more important is the ball-grid-array, or BGA, inspection system for the semiconductor industry that PPT unveiled just last week at the Semicon West Trade Show. This high-margin, $150 million niche market, Christenson observes, is currently dominated by Massachusetts-based Robotic Vision, with perhaps an 80% market share. The No. 2 player, View Engineering, a subsidiary of General Scanning, just exited the business-leaving the door wide open for PPT. At the trade show, the response to PPT's offering was "very positive," Christenson reports, and he expects to be selling units by early 1999.
If PPT captured even 10% of this $150 million market ("I think we'll do more than that," he insists), it would be one big deal for a company whose revenues for the fiscal year, ending October, will run $14-$16 million.
PPT should close out this fiscal year slightly better than break-even. In fiscal '99, on sales of $20 million plus, 30 cents or so looks quite doable. And if revenues top $30 million in fiscal 2000, as Christenson projects, net of 60-90 cents isn't unreasonable.
Despite PPT's ties with big-name customers, its cutting-edge technology and its provocative prospects, the stock lanquishes at 7 1/4. Book value is more than $5, over $3 of it cash. All of which spells c-h-e-a-p.
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