Sunday, April 26, 2009

MICROS Systems, Inc.

MICROS Systems, Inc. (MCRS), is the world's leading developer of enterprise applications serving the hospitaliy and specialty retail industries. MICROS serves table service and quick service restaurants, hotels, the leisure and entertainment industry, and speciality retail stores with complete information management solutions including software, hardware, enterprise systems integration, consulting and support. The company distributes its products through subsidiaries, independent dealers/distributors, and company-owned sales and service offices around the world. This global network consists of over 4,600 employees, more than 80 wholly or majority-owned subsidiaries and branch offices in major markets and 115 distributors in 45 countries.

MCRS operates in highly competitive markets, which include at least 20 significant competitors offering sophisticated restaurant point-of-sale systems. Another concern is the foreign exchange risk, since a substantial portion of the company's revenues are generated abroad.

The company responded to the worldwide recession by reducing costs through layoffs and other cost-cutting measures. In fact, gross margin for the twelve month period ending December 2008 expanded to 52.7% as compared to 52.5% in the fiscal year ending September 2008. Operating margins expanded to 15.4% compared to 14.6% and net margin went to 11% from 10.6% during the same periods.

At the moment, the company's EPS TTM is $1.30 and estimated EPS for 2009 currently stands at $1.32. The conference call scheduled for the end of April may shed some light on short term trends. However, the company does have a history of positive earning surprises. A Jeffries & Co. analyst recently raised his target price for MCRS to $25 from $18. Analyst earnings estimates for the FYE 6/10 range from $1.34 to $1.55. Measured Approach estimates earnings for FYE 6/10 to be as high as $1.91. We believe the current disaster for the hospitality industry worldwide will result in great opportunities for MCRS.

Growth...............TTM.....3 Yr.....5 Yr
Sales.................10.6%..16.9%..18.6%
Gross Income......10.8.....18.4.....20.3
Net Income.........16.5.....23.4.....35.8
EPS Basic...........17.7.....19.5.....31.7
Cash Flow...........18.8.....20.3.....26.8

Multiples
Price/Earnings............15.9
Price/Book..................2.5
Price/Sales.................1.7
Price/Cash Flow.........13.6
Price/Free Cash Flow..12.5

Ratios
Gross Margin %...............52.7
Operating Margin %..........15.4
Net Margin %..................11.0
ROE%............................16.2
ROA%............................10.9
Current Ratio....................2.5
Liabilities to Assets %.......29.9

We place a target value on MCRS of $31.71 which represents a P/E of 16.6X our estimate of FYE 2010 EPS of $1.91. We project FYE 2010 free cash flow of $2.52 which translates to 12.58X multiple.

Disclosure: At the time of this writing, author had no financial interest in any security mentioned.



Monday, April 13, 2009

Netflix: The Short Version

Netflix: The Short Version

Reading about Netflix (NFLX) reminds me of the story of Icarus. Icarus, you will remember, was a high flier who flew too close to the sun. When he did, he crashed to earth. Netflix is ubiquitous for renting out DVD's and Blu-Ray titles by the millions. According to the company's profile, Netflix, 

"provides online movie rental subscription service in the United States to approximately 10 million subscribers. The Company offers a variety of plans and provides subscribers access to over 100,000 digital versatile disc (DVD) and Blu-ray titles plus more than 12,000 streaming content choices. Subscribers select titles at the Company’s Website aided by its recommendation service and merchandising tools. Subscribers receive DVD’s by United States mail and return them to the Company at their convenience using its prepaid mailers. After a DVD has been returned, The Company mails the next available DVD in a subscriber’s queue. It also offers certain titles through its instant-watching feature. Subscribers can watch streaming content without commercial interruption on personal computers, Intel-based Macintosh computers (Macs) and televisions."

"The Company promotes its service to consumers through various marketing programs, including online promotions, television and radio advertising, package inserts, direct mail and other promotions with third parties. These programs encourage consumers to subscribe to its service and may include a free trial period. At the end of the free trial period, subscribers are automatically enrolled as paying subscribers, unless they cancel their subscription. All paying subscribers are billed monthly in advance. The Company stocks approximately 100,000 DVD titles. It has established revenue sharing relationships with studios and distributors. It also purchases titles directly from studios, distributors and other suppliers. In addition, the Company has more than 12,000 content choices licensed for streaming. The Company ships and receives DVDs throughout the United States. The Company maintains a nationwide network of shipping centers that allows it to provide delivery and return service to its subscribers."

"The Company competes with Blockbuster, Movie Gallery, Redbox, Time Warner, Comcast, DIRECTV, Echostar, AT&T, Verizon, Best Buy, Wal-Mart, Amazon.com, Google, Apple and Hulu.com."
Netflix is a fine company that has done a good job growing revenues and earnings. The company's sales have grown 18.9% for the MRQ vs Qtr 1 year ago and 13.2% TTM vs TTM 1 year ago. The five year growth rate for sales is a very strong 38.2%.

Similarly, EPS (MRQ) vs Qtr. 1 year ago is up an astounding 66.7%. EPS (TTM) vs TTM 1 year ago is up 37%. The five year earnings growth rate is an unsustainable 66.4%

The company carries little debt; long term debt to equity (MRQ) is just 10.9%. Total debt to equity (MRQ) is a low 11.3%. The company reports cash and short term investments of $297.3 million and goodwill/intangibles of $100.4 million. Long term debt is just $38 million.

Netflix sports a PE (TTM) of 35X earnings of FY 08 earnings of $1.37. Consensus earnings estimates for FY 09 range from a low of $1.53 to a high of $1.67 with an average of $1.59. Using these estimates, Netflix is selling at 32.3X to 29.6X FY 09 estimates. We estimate earnings for FY 09 to be about $1.75 or 28X earnings.

We prefer to use the P/FCF metric. The company is currently selling at 39.5X trailing free cash flow. We estimate that Netflix will have about $0.81 in free cash flow raising the forward P/FCF multiple to 61X. Projecting out to FY 10, we see free cash flow restrained and rising only to $1.06. This still gives us a P/FCF multiple of 46.6X.

Other standard metrics are also too high. PSR (TTM) is 2.01X; PB (MRQ) is 7.96X and P/Tangible Book (MRQ) is 11.13X. Netflix has seen its price run up by 104% over the past 26 weeks; it is up 57% year-to-date.

By any commonly used metric, Netflix is selling at a price the fundamentals cannot sustain. Though the company has strong growth, this will slow considerably going forward. The company has raised prices yet it has strong competition from Blockbuster, the cable companies and from on-line content delivery systems from major players such as Apple and Google.

We would expect Netflix to be selling in the $8-$12 range or about 10X-14X free cash flow. 

Disclosure: The author has no financial interest in Netflix.




Sunday, April 5, 2009

This is not time to own semiconductor stocks

This is not time to own semiconductor stocks, either chip makers or equipment manufacturers. According to the Semiconductor Industry Association, worldwide sales of semiconductors were $14.2 billion in February, a decline of 30.4% compared to February 2008 sales of $20.3 billion. This is a continuation of the decline observed from the prior year. Sales were down by $1.1 billion from January 2009 levels of $15.3 billion.

'The global semiconductor industry is going through one of the steepest corrections in its history,' said SIA President George Scalise. 'While it would be premature to conclude that the sales have hit bottom, there are some indications that the rate of decline has moderated from the final quarter of 2008.'
'Demand for semiconductors is likely to continue well below 2008 levels for the next few quarters with a gradual recovery to follow as the global economy recovers,' Scalise concluded.'
There are similar problems within the semiconductor materials market. The materials market was flat in 2008 as compared to 2007. Semiconductor materials market sales reached $42.7 billion globally in 2008. The industry group for the semiconductor materials market, SEMI, reports that "the wafer fabrication materials and packaging materials $24.1 billion and $18.8 billion, respectively." These sales figures represent a decline from 2007.

SEMI has also reported that worldwide sales of semiconducting manufacturing equipment totaled $29.52 billion in 2008, representing a "year-over-year decline of 31 percent."  

"The global wafer processing equipment market segment decreased 31%; the assembly and packaging segment decreased 28%; the total test equipment sales decreased 32 percent. Other front end equipment sales declined by 32 percent"
We believe the market is discounting the recovery somewhat ahead of itself. It remains to be seen if the global economy will pick-up before 2010. Even if it does, the semiconductor market may lag the recovery. The companies we have on our watch list, Altera Corporation (ALTR), Analog Devices (ADI), Intel (INTC), QLogic Corporation (QLGC), Taiwan Semiconductor (TSM), Texas Instruments (TXN), and Xilinx (XLNX), are priced as though the recovery is already here. Sales and earnings will continue to decline through 2010. We would wait until there are signs of recovery before being buyers of semiconductor stocks.

Disclosure: Author has no financial interest in any company mentioned in this post.
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