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Friday, January 9, 1998
Danka Business Systems
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Phone: 813-576-6003
Website: http://www.danka.com
Price (1/8/98): $16 5/8
HOW DID IT FIND TROUBLE?
Danka Business Systems was touching all-time highs in August before beginning its slide. The shares of this office automation supplier slipped down through the autumn on lowered guidance and earnings forecast revisions. Still, with the October earnings report the company had stated that its integration of Eastman Kodak's office imaging division was going well.
In spite of these reassurances, in December the company announced that problems related to the integration of the Kodak division would result in a significant earnings shortfall in the third quarter. The stock price plummeted over 50% in a single day. A company that depends on rapid growth is in trouble if it fails to meet expectations.
BUSINESS DESCRIPTION
Danka Business Systems is one of the world's largest independent suppliers of photocopiers, facsimile machines, and other office equipment. It directly markets these products to its customers. The company is based in the U.K. but operates in over 700 locations in 30 countries worldwide.
The company has grown principally through the acquisition of small independent distributors. In fact, the company has bought out over 130 rivals in the past 10 years.
The company distributes Canon, Kodak, and Konica equipment along with other independent brands. Its principal competitors are IKON Office Solutions and Xerox.
FINANCIAL FACTS
Income Statement
12-month sales: $2944.9 million
12-month income: $51.8 million
12-month EPS: $0.89
Profit Margin: 1.8%
Market Cap: $964.3 million
Balance Sheet
Cash: $45.9 million
Current Assets: $1277 million
Current Liabilities: $784 million
Long-term Debt: $900 million
Ratios
Price-to-earnings: 18.7
Price-to-sales: 0.33
HOW COULD YOU HAVE SEEN IT COMING?
In early October, with shares sitting at $43, the stock boasted a PEG of 0.65 and analysts were looking for $60 a share. There were no glaring accounting problems in the second quarter earnings report, although the guidance from the company did result in a trimming of estimates -- not a positive sign.
Although the CFO putatively left the company to pursue a better job, the November 7 resignation should have raised an investor's eyebrow. Turnover of top management, particularly while a stock is sliding, can be a hint of bad news to come.
A trip through the Danka message folder on AOL using 20/20 hindsight provides some other reasons to have avoided the stock. The Janus Funds, a fairly reputable outfit, bailed out in July (15 million shares worth) while the stock was near its highs. On September 7th a poster noted that the Kodak acquisition "has not gone well," prescient in retrospect. Perhaps the most interesting post came in late November when the spouse of a Danka manager posted the warning, "[I]f you heard what I heard about this company over dinner you would sell your stock."
That is the kind of "inside information" only available in cyberspace. Speaking of insider information, the day before the implosion, a large block of shares equal to 0.8% of the company was sold with the stock down over $2. But, that was probably just luck, don't you think?
WHERE TO FROM HERE?
Well, the trimming of market value certainly has made the stock look pretty cheap. The PEG stands at 0.4 or so, and the YPEG valuation is $49 based on estimates of 35% growth (probably wildly optimistic) and EPS of 1.39 for the next fiscal year.
The company trades at a mere 12 times next year's earnings estimates. Still, there are bearish voices. The company has stated that other acquisitions are on hold while it digests the Kodak acquisition, and acquisitions have been the growth engine for the company. Key managers have been leaving and there is concern about a clash of corporate cultures between Kodak and Danka. In addition, a company like this with low margins is vulnerable if economic growth slows in North America and Europe.
The third quarter report has yet to be released. At that point an investor might have a clearer vision of how things are going at the company.
-- Mark Weaver, MD
([email protected])
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