Adept Technologies (ADEP) is a growing provider of intelligent robotics systems and services. The company is growing, cash flow positive, trades at 5.2x NTM FCF, has 35% of its market cap in cash, a huge NOL, significant operating leverage, would be buying back stock (which is down 35% on no news) if it weren’t in an long blackout period, whose LTM numbers do not fully reflect the dramatic operational improvement and has a major shareholder incentivized to create shareholder value.  While this is an illiquid stock, we note that there has clearly been a seller in the market (who has been driving down the stock price) and the stock is still cheap even if one buys shares at a big premium to current prices.  As an example, at $10.00 per share (up 55+% from current levels), the stock is trading at 9.9x free cash flow.

 

ADEP provides intelligent robotics systems and services that enables users to achieve precision, speed, quality and productivity in their assembly, handling, packaging, testing and other automated processes.  The company’s end markets include high speed packaged goods, life sciences, solar, electronics, as well as traditional industrial markets, including machine tool automation and automotive electronics.

 

The company has 2 parts of its business

1)      Legacy – 30% of revenue- Primarily industrial, disk drive and auto end markets.  This is the non-sexy, commodity, and low growth (4-5% top line)

2)      New – 70% of revenue - High margin, high growth end markets that management is focusing on including solar, packaging and medical.

 

Estimated end market breakdowns are packaged goods (25%), medical (20), electronics (20), automotive (15), solar (10), other (10%).

Price                            $6.30 per share

Shares                          8.0

Options                        0.2 (in the $)

Warrants                      1.1  (in the $)

Total shares                  9.3

 

Equity cap                    $58.5mm

 

Cash                            $12.3

Wrrnt/opt proceeds      7.9

Total cash                     $20.2

 

Enterprise value            $38.4

 

Deceiving LTM Figures - At the end of fiscal 2007 (june), ADEP initiated a restructuring to reduce facility and headcount costs. As a result, ADEP has reduced its quarterly expense rate and has focused its resources on its most profitable opportunities (Europe, solar).  The improved profitability has been reflected in the company’s first 3 quarters of this fiscal year, but the LTM figure still has 1 quarter (june 2007) of the old cost structure, which the company will be lapping when it reports results in early September. 

 

 

EBIT ($MM)   -1.9                  0.8                   1.3                   0.8

 

Note: for the June 2007, I excluded $4.1mm of non recurring charges.  Some data providers may not have added them back , which makes the LTM figures even lower.

 

Conservative and deceiving guidance FYE June 2008 Guidance – The high end of company’s guidance is revenue of $60mm (up 22% y/y), net income of $3.4mm (after $1mm of non cash stock expense) and $5.4mm of adjusted EBITDA (excluding non-cash stock expense).  Management acknowledges this is very conservative (see last earnings call) especially since these figures imply Q4 being down sequentially which would be highly atypical.    We also believe that Q4 figures will have some non recurring expenses (legal, marketing) that will not be incurred next year, so as strong as Q4 may look, the normalized Q4 results should be even stronger.  Assuming $5.4mm of adjusted ebitda (which is too low), excluding any cash, minus cash taxes(5.4-2 for dep -1 for stock exp =2.4, @9% cash tax =.3) and capex (800k), free cash flow would be $4.3mm, or ev/fcf of 8.9x…which is cheap, but remember the co is growing so next year will be even better.

 

Our FY 2009 (june) estimates are based on conversations with management and industry participants.  Given the company’s big net cash position, we assume no interest income as we have ‘used” the cash to get a lower EV relative to equity market cap:

            Revenue $71.4mm  - 19% growth over $60mm 2008E (lowball) estimate. 

            Gross profit = $34.2=gm of 48%

            SGA :  27.7 - Runrate sga (4*6.4) + a 5% cushion increase

            Non cash stock expense : $1.0mm

            Interest income: $0.0

            Tax at 8%: $0.4

            Net income: $5.1

            +D&A: $2.1

            +Non cash stock exp:$1.0

            -Maintenance Capex: $0.8

 

            Free cash flow: $7.4

            Ev/fcf: 5.2x

 

Overcapitalized balance Sheet – PF for warrants and options, the company has $2.17 per share of cash on its balance sheet and is cash flow positive.   This cash balance represents 35% of its total equity market cap.  Last year the company almost used some of this cash for an acquisition that ultimately died.  We expect the company to use its excess cash for stock buybacks and opportunistically for acquisitions. 

 

NOL – ADEP has an approximate $83 million federal NOL and a $25mm California, which is rather meaningful given the company’s small market cap.  The company’s cash tax rate (and that on its income statement) is approximately 8%.

 

Non- Cash Expenses Mask True Cash Flow – In this and next Fiscal year, free cash flow (excluding w/c) will be $2mm higher than reported net income.  ADEP will incur approximately $1.0 mm this and next fiscal year of non-cash stock comp expense.  The company also incurs annual d&a of approximately $2.0, much greater than its annual maintenance capex of approximately $0.8mm (the company outsources all manufacturing). 

 

Significant Opportunities for Growth – Management expects revenue to increase approximately 20% annually for the next few years, driven in large part by growth in the solar industry.  In addition, the packaging and medical businesses should experience strong growth as both industries further embrace the benefits of robotics.

 

Sophisticated Major Holder – ADEP’s largest shareholder, Austin Marxe, owns approximately 30% of ADEP’s outstanding shares and warrants for 1.1 mm shares at $6.25/share that expires in November 2008.  Austin Marxe has a board seat and is committed to creating shareholder value.  We believe this is a fairly sizeable investment for them.

 

Significant Int’l Exposure – 78% of revenue is generated from abroad,and that should increase in future years as the Solar business expands.

 

Diverse, Established Customer Base –The company does not have any customer concentration and its customers include Kellogs, Danone, J&J, Nestle, Evergreen Solar, Kraft, and L’oreal.

 

Increasing Demand for Automation – As companies strive to remain competitive, they are increasingly turning to automation because it reduces (increasingly high and unpredictable) labor costs, improves quality, increases output, increases flexibility, reduces waste, etc.  In addition, as a result of several high profile contamination incidents, many companies are turning to automation to insure the safety of their products…this is especially true in the packaged goods and medical industries which combined should represent almost 50% of ADEP’s FY 2009 revenue. 

 

Stock Buyback – Management is actively considering a stock buyback because they realize their stock is undervalued and they have excess cash.  Management has expressed an interest in buying back stock right now, but the company is in a blackout period until earnings are released September 3rd.   The company does not currently have a 10b5 plan in place.

 

Hidden Solar Play – Solar energy market currently represents 10% of the company’s revenue.  The company expects all of its segments to grow next year, but they are especially excited about the solar market which they conservatively expect will represent 20% of next year’s revenue.  Our diligence checks indicate that ADEP’s solar products, sold primarily in Germany and other European countries, have been very well received.

 

 

Uncovered Stock – ADEP currently has no real analyst coverage, although a firm called 21^st Century publishes on the company.  We understand ADEP has had conversations with several more well known sell side firms who MAY eventually provide coverage.

 

 

Conservative Management – Management/the Board is incredibly conservative because:  1) they want to underpromise and overperform; 2) the restatement issue has made they very weary of any potential legal/public company issues and 3) they have no incentive to be aggressive since the company does not need to raise equity (so they won’t issue aggressive guidance or talk up their stock) and ADEP’s largest shareholder (who also has a Board seat) most likely exit (since there “pregnant” and own over 30% of an illiquid stock) is the eventual sale of the entire company.

RISKS:
It’s a Micro cap stock