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Tuesday, May 12, 1998
Presstek Inc.
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Phone: 603-595-7000
Website: http://www.presstek.com
Price (5/11/98): $16 1/2
HOW DID IT FIND TROUBLE?
Never make promises your income statement can't keep. That sage piece of advice came courtesy of a $2.7 million settlement against Presstek's Chairman Robert Howard and a smaller $0.2 million fine levied against President Robert Verrando back in December.
In negotiating with the Securities and Exchange Commission (SEC), the company executives agreed to the fines without admitting any wrongdoing, but the allegations ran deep. The SEC claimed that in 1994 and 1995 Howard distributed copies of the investing newsletter Cabot Market Letter to analysts and individual investors. The newsletter was very bullish on Presstek, proclaiming unrealistic earning estimates that were higher than the more realistic internal projections, but Howard distributed the publication anyway, according to the SEC.
In addition, the investor relations kit distributed by the company included a 1995 bullish analyst report that Howard had taken the time to edit himself. The SEC alleges that Howard had clarified some points but neglected to correct some information he knew to be misleading, including an overambitious projection that printing plate sales would have a fivefold increase over what reality dictated for the year ahead.
Where does company president Verrando fit into all this? The claim went that both Howard and Verrando later drafted a press release that failed to include the material fact that sales to the company's largest client, Heidelberger Druckmachinen AG, were slowing.
Even after the settlement, there was still more excess to erode away. After investor pessimism cut the stock price almost in half, shares were halved again.
With lower earnings now on the horizon, Presstek was pressed itself -- a crushing blow to investors.
BUSINESS DESCRIPTION
New Jersey-based Presstek makes printing press equipment. The company has developed PEARL, a patented, proprietary non-photographic, toxic-free, digital imaging and printing plate technology.
PEARL's thermal laser diode system is capable of imaging various types of Presstek printing plates either off-press or on-press to produce full-color lithographic printed materials. Presstek is also engaged in the development of additional products and applications that include both computer-to-plate and other direct-to-press applications.
FINANCIAL FACTS
Income Statement
12-month sales: $95.9 million
12-month income: $13.8 million
12-month EPS: $0.42
Profit Margin: 14.4%
Market Cap: $540.6 million
Balance Sheet*
Cash: $5.2 million
Current Assets: $47.4 million
Current Liabilities: $14.5 million
Long-term Debt: None
(*As of Jan. 3, 1998)
Ratios
Price-to-earnings: 39.3
Price-to-sales: 5.7
HOW COULD YOU HAVE SEEN IT COMING?
The claims made in Cabot Market Letter sounded too good to be true. They may even have made one a bit skeptical -- if not for the fact that company executives were seemingly endorsing the newsletter's findings.
But in the summer of 1996, as Cabot's editor Carlton Lutts was singing the praises of the likes of Presstek and Iomega <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IOM)") else Response.Write("(NYSE: IOM)") end if %>, his son's money management firm was lightening up on those very shares.
This was similar to the front-running allegations that dogged former Fidelity Magellan fund manager Jeffrey Vinik, who was accused of praising Micron Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MU)") else Response.Write("(NYSE: MU)") end if %> in interviews, while at the same time dumping shares of the chipmaker from the fund.
While the series of events should have discredited both Presstek executives and the bullish publication, what was left was a company with a quality product and a growth streak that was significantly lower than advertised, trapping believing investors in a tale of decelerating expectations.
WHERE TO FROM HERE?
Just when Presstek figured it could put the past behind -- it came back to trip up the future. Heidelberg had requested more Quickmaster Direct Imaging kits by the end of last year, as many as four a day, expecting brisk sales. But those revenues have been slow to materialize, so Heidelberg is facing bloated inventory and has had to scale back orders to Presstek.
Presstek believes it will make up the revenue shortfall. With new outlets for its thermal plates and direct-to-plates product lines, as well as the PEARLGold rollout, the company believes that casting a broader net will more than offset the loss from Heidelberg. Among the new ventures is a production and development deal with Japanese photography giant Fuji <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FUJIY)") else Response.Write("(Nasdaq: FUJIY)") end if %>.
Yet the costlier products and the startup costs involved in introducing a new product will gobble away at profit margins. Be it flat or higher sales, Presstek now expects this year's earnings to come in below last year's $0.44 a share showing. That is not a welcome sign for a company that even after the share price debacle still commands a rather lofty P/E ratio.
-Rick Aristotle Munarriz
([email protected])
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