Iomega Bear's Rebuttal
by Paul Larson (TMF Parlay)

It's time to stop using the rearview mirror to drive, Pat. Do I really need to remind you that Wall Street cares about *future* cash flows and not the history books? The reason Iomega is at its lowest valuation in three years is because Iomega's outlook going forward has not been this gloomy and uncertain in some time. The valuation for Iomega looks anything but cheap when you look ahead at the anemic expected earnings growth and the poor quality of those earnings heading into the next century.

Iomega earnings are up significantly over 1996's posted numbers. Bravo! But what about the future? The current mean analyst estimate sits at $0.50 per share for 1998, or about 19% earnings growth in the coming year. Does 19% earnings growth for a stock with a trailing PE of 24 really sound all that undervalued? We Fools like companies that have earnings growth higher than their PE ratios, which Iomega clearly does not have at the moment.

Look out to 1999 and the projected growth slows even further. The lone analyst estimate for 1999 sits at $0.56 per share, or about 12% growth from the 1998 number. Where's the explosive growth? Frankly, I'd even be surprised if it even hits this 1999 number for all the reasons I articulated in my original argument.

What about 2000 and beyond? That's when things really start to look scary because that's when Iomega's meat and potatoes, the Zip line, should start to seriously fade. I have yet to see a single product out of Iomega's R&D that will come anything close to replacing the Zip sales when they tail off. The Jaz drive has no price or functional benefits over the competition nor is the need for removable storage at those sizes likely to increase much over time. The Clik! product line has some potential as a niche product, but it ain't no Zip.

Actually, there is some evidence that Zip sales are fading already. In the most recently reported quarter, North American sales slowed to a mere 5% sequentially while the rest of the globe saw much higher growth. The computer industry in North America is a product cycle or two ahead of the rest of the world and normally makes for a good leading indicator of what's going to happen abroad. The writing is on the wall.

Buying Iomega now is like making a bet that the Chicago Bulls will win the NBA title in 1999. Both Iomega and the Bulls are to be applauded for their great runs, but 1999 is going to be tough with their stars absent. Maybe Jordan will come back for one more year just as Iomega might be able to extend Zip's product life another couple quarters, but the prospects of these events happening don't look good. And with a dearth of exciting draft picks (new products), reminiscing about the past sure does sound a lot more pleasant than thinking about the future for those who love both the Bulls and Iomega.

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