Valence's tax could be much smaller than your estimate.
You wrote:
William, actually tax losses are taken on first come first used, all of it as soon as you
have earnings, their are limitations on how long you can carry these forward, but that is
about it, so within the first quarter of profitability at the rate of even $100 MM /quarter
(which I still think is high) the tax break will evaporate. Their are tax breaks that Ireland
give to companies like VLNC that reduce the normal tax rate of 35% on US
corporations (it depends a lot where the "marketing arm is and what they manage to
negotiate with the IRS as fair arm length transactions between the marketing arm and
the manufacturing arm), but in any event there is a believe a minimum of 20% plus
state taxes which vary between 5% to 10% between the various states, so at least a
tax rate of 25% should be expected.
Response: Valence is headquartered in the Grand Caymans, and has their manufacturing base in Northern Ireland, so US tax law doesn't apply. From what I understand, NI doesn't have an income tax on corporations, but instead has a Value Added Tax system (VAT). In a VAT system, businesses that have a lot of invested capital and R&D costs, end up paying a very low tax rate as a percent of earnings.
The Valence business organization is structured very effectively to minimize taxes. Last summer we discussed the tax rate at NI on this thread, and its quite low. I believe the eventual tax paid, as a percentage of BT earnings, will be less than 15%. This is similar to other manufacturing corporations that have this kind of set-up.
You wrote:
Another little "problem", which is a nice problem, but yet a problem, to generate a
billion in sales, one would typically need $300 MM in working capital (inventories, accts
receivable less accts payable). In VLNC case, it might be a little higher since the
process requires a quarantine of 30 days, increasing inventories to at least 45 days of
production or 125 MM of finished goods, best case, and if the margins are indeed what
is suggested, than you'll nee another $25 MM only of materials and materials in
process, and accts receivables at 45 days adds another $125 MM. These numbers are
on the low side, but in any event that money will have to come from somewhere,
eventually it will come from earnings, but until earnings kick in, there is some cash that
is needed to oil the machine.
Response:
I checked out the balance sheets of several billion dollar revenue companies that I follow, and find their balance sheets aren't as strong as this. For example, Hadco, the largest bare printed circuit board manufacturer in the US, just reported revenues of $255M in the latest Q. They have $218M in current assets, less $82M in AP, comes to about $136M in working capital required for a billion dollar revenue stream. They also have to purchase and maintain expensive machinery to make the boards, and incur fairly expensive material costs, similar to Valence. Furthermore, their gross margin in their very competitive business is around 15%, so they would actually need more working capital than a 30%GM player, as we would initially expect Valence to be.
I think a better argument would be to look at the Capex required to get to $1B in revenue. However, Valence could see significant cashflow higher than reported earnings, due to the depreciation on their existing plant and equipment.
You wrote:
The main questions are how "rational" are the assumptions of 1 Billion in sales in three
years, that comes roughly to about 1.5 MM laptop batteries per year, which I believe is
close to 10% of what the laptop market is expected to be. And of course, how rational
are the 30% profits margins after taxes. In the first year of full operation, one should be
happy with 5% margins, but since there will be no taxes, probably around 10% or so.
At maturity, I would doubt that after taxes margin much in excess of 10% will be
forthcoming, this high for the best run companies in the US, and so far, VLNC cannot
claim to be in that category. Things could change, however.
Response:
Zeev, the market forecasters are estimating around 15 million new laptops this year, with a growth rate exceeding 25% per year over the next five years. Some are even more bullish on growth than this. In three years at 25% growth rate, the market will double to around 30 million units a year. Add 10-15 million units for spares and replacements, and the market will be close to 40-45 million units. Your estimate of 15 million units is way low.
OTOH your math is messed up. The total market for 40 million units at $75 per battery is $3 billion. If Valence is to get to $1B, then they will need to practically monopolize the market, or get a lot of revenues elsewhere. the cellphone market is expected to also grow over 25% per year to 400 million units a year. At $10 per battery, this is another $4B market.
Adding in other markets, it is possible that Valence could hit $1B in sales, but its a bit of a stretch. Somewhere around $300 million in sales gets VLNC to about a $2.0 billion market cap, and that's good enough for me. If they take 20-30% of the these markets in three years, and hit a homerun, that would be nice, but I wouldn't count on it. On this , you and I agree.
Paul |
