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Published: March 22, 2010
During the past few years, companies have
sought to cut all non-essential expenses. Office equipment was
among the many items that saw a sharp slowdown in demand. But
like all other hard goods, copiers and the like tend to wear out
over time. So as the economy moves into recovery mode, a
replacement cycle can't be too far off.
This cycle should play right into the hands of Electronics
for Imaging (Nasdaq: EFII), which provides the printer
engines that go into high-end machines offered by companies like
Canon (NYSE: CAJ), Xerox (NYSE: XRX) and Epson.
These companies are starting to see a nice turnaround in demand
that is in turn fueling a turnaround for EFI.
It's fair to wonder why those esteemed firms wouldn't simply
develop their own printer engines. The answer lies in EFII's
massive R&D spending, which has enabled the company to stay on
the leading edge of printer capabilities. EFII knows that those
customers are great at selling, and it prefers to keep it simple
by focusing on product advancements that help to maintain its
cutting edge reputation.
EFII routinely spends more than $100 million on annual R&D --
and that accounted for nearly 25% of sales last year. The
payoff: EFII is rolling out a range of new products in both its
inkjet division (42% of sales) and Fiery printing engines
division (47% of sales). Fiery is the brand name for EFII's
state-of-the-art printer systems.
EFII was duly humbled by the recent downturn after many years
of profitable growth. But if history is any guide, a solid
rebound could be in the offing. Back in 2002, the company saw
sales fall from $518 million to $350 million. As the economy
rebounded in the ensuing decade, sales steadily rebounded to
$621 million by 2007. But they fell back again in 2008, and
quite sharply in 2009, all the way down to $401 million.
Yet a snapshot of recent trends indicates that we're entering
another rebound phase. Quarterly sales, which fell to the $90 to
$95 million range in the first two quarters of 2009, recently
moved back north of $100 million -- to $114 million in the most
recent quarter. And even though sales are likely to be soft in
the seasonally weak March quarter, they should still be handily
above year-earlier levels. EFII looks set to post solid
double-digit quarterly sales gains in 2010, even as many
companies remain capital-constrained. As credit opens up for
small and medium-sized businesses down the road, EFII looks set
for additional double-digit sales gains in 2011 as well.
EFII has been using the downturn to its advantage by buying back
massive chunks of stock and sharply reducing expenses. The
company had 68 million shares outstanding in 2007, but has since
removed 20 million shares from the market. Moreover, operating
expenses fell by more than $200 million in 2009. If the share
count had remained static, EFII would likely earn around $0.50 a
share in 2011 (assuming sales grow +15% this year and +10% in
2011). The reduced share count would propel that figure to
around $0.70.
The other appeal for investors is the likely floor in place for
the stock's price. Shares trade for right around
book value and a little more than two times cash. The shares
would likely find support in the $10 range, even if sales growth
proves slow to materialize. As noted above, first quarter
results might appear weak on a sequential basis. Yet management
is likely to note on the conference call that sales trends for
the seasonally important second and third quarters are extending
the promising trend seen in the December quarter. A bullish
outlook from management could be the catalyst to send shares
higher. With modest downside, and potentially impressive upside
toward the $20 mark, the risk/reward on EFII looks quite
appealing.
-- David Sterman
Contributor
StreetAuthority |
