Iomega supplier IMP Inc. is featured in a Special Section today, examining whether the success of Iomega necessarily translates to companies associated with it
MF Merlin's Economic News today covers the National Association of Realtors' report on sales of existing homes during March and the Labor Department's report on new claims for state unemployment insurance for the week ending April 20. You'll find the Economic News, as well as all our Special Sections, FoolWires, and earnings reports, on the Evening News screen. In tonight's Fool on the Hill, MF Templar examines IMP Inc. Enjoy!
DSP Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DSPC)") else Response.Write("(NASDAQ: DSPC)") end if %>, developer of systems for wireless personal communications, reported earnings of $0.18 per share (EPS), beating analyst estimates by four cents. Revenues were up 307% over the year-ago quarter, and investors rushed to buy shares, driving the price up $6 1/2 to $38 1/4. Nathan Hod, President and Chief Executive Officer (CEO) added that the company is "now supplying six major consumer electronics companies."
Integrated circuit-maker Integrated Device Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IDTI)") else Response.Write("(NASDAQ: IDTI)") end if %> reported record earnings, with EPS up 53% and revenues up 61% over the year-ago period. Revenues, however, were down from the immediately preceding quarter. Len Perham, President and CEO, explained that, "While demand grew stronger as the quarter progressed, pricing for SRAMs remained depressed." SmithBarney was impressed enough to upgrade the company to "buy" from "neutral", and shares jumped $1 7/16 to $15 7/16.
Nutrition for Life <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NFLI)") else Response.Write("(NASDAQ: NFLI)") end if %>, network marketer of nutrition supplements and Mega-Memory tapes, rebounded strongly today, up $2 1/4 to $12 1/4, after a string of bad PR, ranging from an SEC investigation to litigation woes, to changed auditors. The wildly-volatile stock has moved between $2 1/2 and $35 in the past 52 weeks.
QUICK TAKES: RMI TITANIUM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RTI)") else Response.Write("(NYSE: RTI)") end if %> shares rocketed forward $6 1/4 to $24 3/8, with the company denying that there is any pending news. The company makes titanium mill products, parts, and powders. . . ACME ELECTRIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ACE)") else Response.Write("(NYSE: ACE)") end if %> rose $5/8 to $12 7/8 following an apparent turnaround in earnings and prospects of robust revenues, due to potential order increases from major-customer Cisco systems and a possible Air Force contract. . . ION LASER TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ILT)") else Response.Write("(NASDAQ: ILT)") end if %> appointed Art Thompson as president of its dental division, and investors rejoiced to the tune of $2 1/2 as the stock rose to $19 1/4. Among other things, ILT develops laser systems for tooth-whitening. . . ISOCOR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ICOR)") else Response.Write("(NASDAQ: ICOR)") end if %> shares leapt $2 1/2 to $16 1/4 after the company reported revenues up 92% over the year-ago quarter and earnings per share (EPS) of $0.03, $0.02 more than analysts had estimated. . . SUGEN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SUGN)") else Response.Write("(NASDAQ: SUGN)") end if %> rose $1 5/8 to $14 3/8 after the company postponed a 3.5 million share offering, citing "market conditions". . . WORLD COLOR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WRC)") else Response.Write("(NYSE: WRC)") end if %> lifted $2 1/8 to $22 5/8 after it reported net income up 35% from the year-ago quarter and that it would buy Ringier America for $415 million, including its debt. . . GENZYME TRANSGENICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GZTC)") else Response.Write("(NASDAQ: GZTC)") end if %> reported operating revenues up 69% and shares rose $1 to $9 in response.
Investors in Seer Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SEER)") else Response.Write("(NASDAQ: SEER)") end if %> might be wishing they had consulted a seer before plunking down their cash. The developer of information systems software reported a loss of $0.39 per share -- over twice as ghastly as analysts had predicted. President and CEO Gene Bedell explained that their business relied on very large contracts with major customers and that the timing of these had "significant impact on our interim results". Shares saw their way down $1 to $5 3/4.
PLC Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PLC)") else Response.Write("(NYSE: PLC)") end if %> shares fizzled $3 1/2 to $30 after the cardiac revascularization company beat earnings estimates handily but admitted that it had not yet achieved sustained profitability. A chief product is the Heart Laser, for which PLC earns $25,000 upon installation and then collects fees for each patient treated. The company has had considerable international success, shipping Heart Lasers to roughly 15% of the country's cardiovascular centers in the past year.
Maxicare Health <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MAXI)") else Response.Write("(NASDAQ: MAXI)") end if %> did not max out today. Analysts had predicted earnings of $0.38 per share, but the company reported $0.31 instead, and sent shares tumbling down $4 3/8 to $23 1/2. The company operates a system of HMOs and preferred-provider organizations in several states and two days ago announced MAXI-CHOICE, a triple-option point of service product offering customers more choice in their coverage.
QUICK CUTS: SUNBEAM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SOC)") else Response.Write("(NYSE: SOC)") end if %> was downgraded by McDonald & Co. from "buy" to "hold", based on the belief that it would be a while before the company improved its fundamentals. Investors downgraded the shares $1 1/8 to $14 3/4. . . BOSTON BEER CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SAM)") else Response.Write("(NYSE: SAM)") end if %> reported record earnings which lost their sizzle quickly, sending shares down $1 1/8 to $19. Sales increased 40% over the year-ago period, but the gross margins dropped. . . STERLING CHEMICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STX)") else Response.Write("(NYSE: STX)") end if %> reported less than sterling earnings, with revenues 37% lower than last year, and shares fell $7/8 to $12 1/8.
FOOL ON THE HILL:
On Iomega's Coattails. . . IMP Inc.
Finding the upstream suppliers for successful companies and booming industries is a familiar tactic of former Vanguard Windsor steward John Neff. By upstream, we mean that one simply looks for companies that could potentially benefit from the success of another. Today's frenzy in IMP Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IMPX)") else Response.Write("(NASDAQ: IMPX)") end if %>, and to a lesser degree HMT Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HMIT)") else Response.Write("(NASDAQ: HMIT)") end if %> and SmartFlex <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SFLX)") else Response.Write("(NASDAQ: SFLX)") end if %> is a direct result of investors putting this investment theory into practice.
Let's be serious, though -- this is not necessarily the most foolproof investment approach. Although IMP may have merits only recently revealed to the majority of the investment world as a result of the recent Dorfman-inspired frenzy, one should not utilize upstream suppliers as your sole investment theme. In the end, the suppliers to great companies rise and fall on their own merits -- they are not by necessity dragged along the road to riches.
IMP supplies Iomega with the MP62C538 Programmable Read-Channel integrated circuit for the Zip drive, something that has caused it to move up $2 1/8 to $15 today after a similar move the day before. HMT Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HMTT)") else Response.Write("(NASDAQ: HMTT)") end if %>, a supplier of magnetic media for Iomega's Jaz drive, also soared $1 1/4 to $19 3/8 today after a brief mention in the Iomega folder. Even SmartFlex Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SFLX)") else Response.Write("(NASDAQ: SFLX)") end if %> pounded out a $2 3/4 gain to $16 3/4 after a mention on the Iomega board.
Investors stirred into a frenzy by the success of their Iomega shares need to appraise the prospects of these suppliers in the same cold light that they examined Iomega not too many months ago. Barry Revel (MF Logman), has been doing an excellent job of this in the IMP folder, an excellent resource for those who want to understand how the story has unfolded. Revel outlines the following tale of IMP, enhanced by my own commentary.
For the last five fiscal years, IMP's revenues moved as regularly as the tide, flittering around the $50 million mark since 1991. Net earnings relentlessly moved toward positive territory, finally breaking through in fiscal 1994. Net profit doubled in the next year, giving the company three cents in earnings per share (EPS) for the entire year on a 1.3% profit margin.
The company began fiscal 1996 with a bang, earning $0.06 EPS in the first two quarters, effectively doubling their prior year in the first two quarters. The earnings from the third quarter of $0.06 EPS quadrupled the benchmark of the prior year. Revenue trends were solid, with the company reporting $54 million in revenues in the first three quarters -- about even with what it did for the entire fiscal 1995. The most impressive development was the improvement in profit margins. The company posted 8.3% margins in the fiscal second quarter and gave guidance that margins were headed to the 10% level.
What has driven IMP's margins upward has been the revenue shift away from its foundry business and towards its proprietary chips. In the semiconductor world, a number of companies serve as foundries for hire, making chips for "fabless" semiconductor companies that are just design houses. Although this work tends to push revenues up to exorbitant levels, there really is not a lot of profit in it as it is essentially contract manufacturing. Developing and manufacturing proprietary designs, however, is a fairly high margin business. With a proprietary-foundry revenue mix of 30%/70% in the fiscal third quarter and proprietary revenues expected to be 40% of the fourth quarter, IMP is not necessarily in outer space when they say margins are going higher.
The real reason investors in the last few days have become increasingly positive on IMP is because of the fact that it is a sole source supplier of the so-called Zip chip, a single chip IMP developed that incorporates what used to be four chips in the Iomega Zip drive. The proprietary Zip chip has been a significant component in driving IMP revenues upward, but as the recent deal for $10 million in product illustrates, it is still a minority of IMP's total business and proprietary business. That said, the company sports a 1.3 book-to-bill ratio -- not bad in the days of the below 1.0 score for the industry as a whole.
IMP's other claim to fame is the Electrically Programmable Analog Circuit (EPAC), a field programmable analog chip. IMP sees this product alone accounting for $100 million in annual revenue in the next five years, fueling the 30% annual revenue growth target that management has set for themselves. IMP's press kit says that there is no competition for the EPAC, not surprising if you consider the fact that the fine art of building analog chips still requires a lot of skill no matter what you have heard about today being the Digital Age.
Contrary to popular opinion, analog is still vital and much harder to knock-off than digital in many cases -- particularly when it is a mixed signal chip, incorporating digital and analog in the same wafer. Analog chips have a faster switching speed and higher current capacity than digital chips, meaning that designing in analog for products where size matters is a necessity.
All those positive things said, the stomach-churning aspect to IMP is the fact that Rockwell is currently their largest customer, accounting for about 25% of their business. Iomega is about to overtake them, still leaving 45% to 50% of IMP's business concentrated on two large customers. Hewlett Packard's Colorado tape drive unit and Level One Communications are also substantial buyers, suggesting that an even larger amount of business is concentrated on only four names. As no company ever wants to be held hostage to one supplier, IMP's association with any one of these companies does not guarantee future success and in fact introduces some serious risk. Rockwell Semiconductor failed to fab components at IMP's foundries last year after committing to do so, a fact which highlights the danger a company that relies on only a few large customers' faces.
Estimates of $0.20 EPS this year and $0.40 EPS next year with a 30% annualized revenue target suggest a share price in the mid-teens, about where the stock has come to rest today. The margin expansion that has come from the shift away from foundry business has been sharp, but will begin to ebb in the coming quarters, meaning that the 100%-plus gains in earnings per share may become a thing of the past after next year.
Frankly, at today's price investors have already built a lot of positive developments for the next few quarters into the shares. Although IMP could in fact execute well and break through those $0.40 EPS estimates for next year, even $0.50 EPS or $0.60 EPS is still built into the current share price if long-term growth levels off to an impressive 30%. As investors have learned over the past few months with semiconductors, the ebb and flow of the business creates dramatic spikes in demand. Even if the overall trend is up, you will ride the semi-cyclical roller-coaster on your way there. As for HMT Technologies and SmartFlex, those guys have their own stories that investors should examine just as carefully as I have done above.
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Byline: Randy Befumo (MF Templar)