Tuesday, June 3, 1997

Avid Technology, Inc.
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Phone: 508-640-6789
http://www.avid.com
Price (6/3/97): $22 5/8

HOW DID IT DOUBLE?

Avid Technology specializes in post-production tools that allow film, video, and audio editors to perform wonders on a workstation that would have been unimaginable before the digital revolution. And like a cyborg that magically survives a near-death experience thanks to some dazzling post-production special effects, Avid is back after a perilous 1996.

From 1992 to 1995 the company experienced stellar growth, with revenues rising from $69 million to $407 million. Then last year, due to a difficult product transition and a decision to scrap a new product line, the company was buried by write-offs and restructuring charges: $20.2 million in the first quarter then $13.2 million more in the third quarter. After trading near $50 a share in the fall of 1995, these shares charted a painful course to a March 1996 low of just $9.

With former Quantum Corp. CEO William J. Miller now at the helm, Avid has investors cheering once again. The recent rise has been triggered by two events. On March 24, the company announced that INTEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %>, looking to beef up support for its MMX multimedia technology, would pay $14.8 million for a 6.8% stake in Avid, which will supply software appropriate for Pentium II systems.

Then on April 24, the company surprised Wall Street by reporting earnings of $0.08 a share versus the $0.09 per share loss analysts were forecasting. Avid investors sent the stock up $3 7/8 to $18 7/8 on the news, and it has continued climbing since.

BUSINESS DESCRIPTION

This Tewksbury, Massachusetts firm develops and markets systems that allow the creation and manipulation of digital media using a computer. These systems consist of Avid's software tools and other manufacturers' hardware. They can convert analog source material, such as video or film, into a digital format so that it can be edited on a computer, making creative post-production work easier and less expensive. This is the stuff used by the folks who make The X-Files and films such as The Fugitive. Avid also markets products used to create content for television broadcast news. Nearly half the company's sales last year came from international markets.

FINANCIAL FACTS

Income Statement*

      12-month sales: $445.2 million
      12-month income: ($13.5 million)
      12-month EPS: ($0.64)
      Profit Margin: N/A
      Market Cap: $492.1 million
      (*Includes one-time charges)

      Balance Sheet
      Cash: $123 million
      Current Assets: $259.7 million
      Current Liabilities: $93 million
      Long-term Debt: $1 million

      Ratios
      Price-to-earnings: N/A
      Price-to-sales: 1.1

HOW COULD YOU HAVE FOUND THIS DOUBLE?

Avid has an award-winning line of products and a solid reputation with entertainment professionals. A company with such an impressive track record prior to last year's stumble would have made a likely turnaround candidate. An alliance with Intel is always good news, but especially so for a company that's been suffering in the wilderness. When Avid did to earnings estimates what the aliens in Independence Day did to the White House, investors should have jumped out of their seats. Some did.

WHERE TO FROM HERE?

Despite the reasonable expectation that the recent good news would move Avid shares higher, the stock price already more than discounts analyst earnings estimates. A PEG is impossible given the past year's losses. But with $0.61 per share expected for FY97 and $1.05 for FY98, Avid is now priced at 39 times this year's estimates and 23 times the numbers seven quarters out. With one analyst projecting long-term growth of just 20%, even an extremely aggressive YPEG of $21 suggests that these shares are overvalued.

A glance at the first quarter results reveals that the company derived nearly half of its net from a large increase in interest income. Also, a transition to new products for Intel-based PCs and a shift toward an increasing reliance on lower-margin, indirect sales channels will present challenges in the near term.

Avid does have a nice cash hoard and no debt. And with Intel inside, it could prove dangerous to bet against the return of this one-time highflier. Still, after the recent run, the stock may need some jazzy new special F/X before it sees another double.

-Louis Corrigan ([email protected])

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