Electronics for Imaging EFII
June 05, 2000 - 6:50pm EST by
2000 2001
Price: 20.00 EPS 1.78
Shares Out. (in M): 58,202 P/E
Market Cap (in $M): 0 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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EFI's mission in life is to supply controllers which accelerate the printing speed on laser printers. They also produce the 'Fiery' Color Servers which incorporate hardware and software technologies that transform digital color copies from all leading copier manufacturers into fast, high-quality networked color printers. If this sounds obscure it is, but EFII has grown this to a 602m business with high margins and has its technology in all major printer manufacturers. Tonight, after the stock price had been falling like a stone for a while, they pre-announced. I'll let you go to Yahoo for the press release, but suffice it to say sales were under expectations by a small bit and earnings will be 10c under the 50c 2nd estimate and just about flat compared to a year ago. EFII promises a buyback plan and that the 2nd half will experience stronger growth.

Why should you be interested? Maybe you shouldn't, but I'm using one of my 6 ideas here to get feedback on this one, hopefully from somebody who knows the story better than me. Here's what I find attractive:

-The balance sheet is grossly overcapitalized, with 442m in cash ($7.59 a share) above and beyond all liabilities.

-Trailing cash flow, even after the shortfall, should still be well above 100m. CapEx is usually nominal here, esp. when they aren't building the obligatory corporate campus. With that, CapEx is about 15m, so most of the cash flow is free cash flow

-Valuation is very low. At 20 in the after-hours trade tonight, EFI's PE was 11.7. From the total market cap of 1215 I remove 442, so our cap sans cash is 773, or a P/E-cash of 7.5.

-Company has an illustrious history, building revenues and earnings at a rapid pace, with only one major bump in their history which was related to the inventory builddown of their major Japanese printing manufacturers a couple years ago. Then, the price went from 60 in the high to 12, where I also bot. The problem this quarter isn't as serious (earnings went negative then).

Here's the negatives as I see them:

-the main one is that this is a bloody obscure business, esp. for the ordinary types like me. I've always wondered what made Xrox or Ricoh or Canon use EFI products - which have very high margins - but I don't know the industry so I don't know what makes EFI so special.

-this is a niche business, so if you looking for a gorilla PE ratio then you've come to the wrong place; there's no way to really judge when EFII has a problem either

-insiders ownership is pitiful, and option dilution can be a huge problem (not right now though!)

But for 7.5x earnings (ok, that's my number, but that's how I think of these things) a bunch of problems can be overcome. And if EFI hit...say...15 tomorrow, the 'adjusted' PE would be 4.2. I wouldn't be overly surprised, esp. if it opens that low.



Earnings remain stable for the next few years and the company uses its cash wisely; one good eps report
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