Wall Street
analysts have given up on Avid Technology (4 neutral ratings, 3 sells,
including two Focus Sells!). I think that times are about to change. Avid
(AVID $23.11 on 5/15/08) is the worldwide leader in
providing enterprise software for video broadcasting, and audio and video
editing and production. Avid also has a consumer video production and editing
business.
Having
been a Wall Street analyst, I understand where they're coming from. The company
has missed projections and generally underperformed for years, making any
analyst look silly for recommending it. No client would listen to a bullish
recommendation from them anyways.
Here are the facts - you decide:
Market Cap: $855MM
Enterprise Value: $705MM
2007 revenues: $930MM up 2% from 2006 levels
2007 Free Cash Flow: about $52MM
Trailing Free Cash Flow Yield: 7.4% (52/705)
- Avid is in a good
market. As broadcasters switch from videotapes to digital editing and
production, new equipment will be required from inside the stations, to remote
trucks, to cameras. The trend to HDTV requires new equipment and software, too.
These are inevitable changes which will take place over years creating steady
business for the technology providers.
-
As a market leader in all three of its divisions, they should garner a premium
valuation should this turnaround work, or sell off a piece or two along the
way. Large-cap companies including Thomson, Harris Interactive and Oracle are
potential buyers, not to mention private-equity players.
- New CEO, Gary Greenfield, has a track record as a turnaround CEO, most
recently in the public market as CEO of Peregrine Systems after the company
ousted prior fraudulent management. Investors who bought Peregrine debt upon
his arrival did very well. Ken Sexton, joined Avid as Chief Accounting Officer,
and has worked with Greenfield at Peregrine as well as brief stint at
WebMethods leading up their acquisition by Software AG
- Management has indicated that large restructuring initiatives will be
announced in July, that should drive Q4 operating margins to the 10-15% range,
in our estimation. Not a reach for a large software company.
- Company has bought back over 4 million shares year-to-date, reducing
sharecount over 10% to 37 million shares.
- New CEO and all new management incentive compensation is tied to incremental
return on capital gains and stock price. CEO stock options strike at
$23.36/share, so he is incented from here.
- Wall Street ratings are almost uniformly negative - with 3 sell ratings and 4
neutral ratings. What's more Avid finds itself on TWO "focus sell"
lists - at JP Morgan and Kaufman Brothers. The thesis of these sell ratings are
poor recent performance and lack of clarity on turnaround plans. I believe a
call to any of the analysts with sell ratings will show that none of them have
done any rigorous research. They are simply assuming bad results will continue.
- Blum Capital filed an amended 13D filing announcing its intention to raise
its stake in Avid to over 25% of the company, from the high teens during Q1. With
a representative on the board of directors, one should probably consider this
aggressive insider buying.
Here's the
punchline:
Assuming that a restructuring allows Avid to reach 12% margins next year on
$930 million in revenues (no revenue growth assumed) yields $110MM in operating
profits. Put a 12x multiple on that gets you to $1.34B enterprise value add
$100MM in cash (which assumes $50MM cash restructuring expense) and you have
$1.44B market cap, which is $36/share. Assume that Avid participates in market
growth and the numbers get bigger.
I own Avid.
My clients own Avid.
