intrinsic value! ACLS now under $2.00. Why?
"Valuation of ACLS 25-Feb-11 09:53 am
I probably have to start off by saying that I sold my shareholding at $3.05 more than two months ago.
I do not usually focus on P/E as it is a bit meaningless and easily manipulated. Plus ACLS has not had a net profit for years but was still worth $6 a share at one point. And that was clearly based on fwd-looking EBITDA than on potential for net income.
So, I conducted my analysis based on revenues and EBITDA rather than on Net Income and P/E.
Clearly, nobody can predict the market for ACLS' products correctly but an estimate of 20% of top-line growth seems realistic and in line with management forecasts. Hence, my assumption for FY2011 revenues is $330.2m. Management mentioned on the call that they expect the margins to contract this year, especially in Q1. Gross margin in 2010 was 31.2% and it varied between 26.8% and 34.1% between the four quarters. For 2011, I've assumed that there is margin pressure in Q1 but gradual improvement later brings the overall margin to 32.0% or $105.7m of gross profit.
I've analysed then all the costs and assumed a very conservative R&D cost of $38.0m for the whole year. This assumption is made on the basis that the bulk of the capital cost for the new products was already made in 2008-10 ($135.4m over 3 years)and now ACLS mostly stands to gain from the sale of the products with much less R&D expenditure. I've kept G&A and S&M almost the same as this year, although they could hire more staff if revenues are to increase by 20%, so costs could be slightly higher.
EBITDA then comes to $13.4m for FY2011.
The other component for the valuation is cash flow and effectively how much is actually turned to real cash on the balance sheet.
Cash flow in ACLS' case is almost entirely driven by working capital and especially by inventories and acc receivables. The company has managed inventories relatively well, however, acc receivables are very high due to the increase in sales. With sales growth expected to continue, acc receivables would have to be managed extremely well this year.
Working capital was negative by $11.3m in 2010 due to the above-mentioned factors. However, I do expect them to focus on WC management and my calculations show a $22.5m gain from WC with the majority coming from inventory turnover and acc payables reduction in days. So, roughly we could expect this $22.5m to be added on top of the existing $45.7m of cash. I assume all other CAPEX will be funded from cash flow from operations excl. working capital.
Applying a not-so conservative multiple of 8.5x EBITDA gives us an Enterprise Value for ACLS of c. $114.0m. Add back the cash of $68.2m ($45.7m + $22.5m) and your equity value is $182.0m. This gives you a value of $1.74 per share.
Now, the caveat to this valuation is that it is very dependant on the gross profit margin being 32%. Increasing it to the maximum it has been over the last three years (34%) would give you a $2.30 per share.
However, now that management has identified a weakness in margin, going above 32% would be extremely hard.
My suggestion would be to wait for a few months until ACLS drops below $2.00 and then load. This is a good company that is suffering a temporary setback. "
post by canarywharf
