Description
Imagistics International is an undervalued company that should see significant cash flow growth as it completes the roll out of its Enterprise Resource Planning (ERP) program in the next 12-18 months. Trading at approximately 12.5x 2005e after-tax free cash flow (before working capital), the company should generate atfcf in excess of $4.00/share in 2006 (creating it at 8-9x) and forward as it eliminates approximately $30-$40mm in one-time costs and capex incurred in the implementation of the ERP program. The company also has growth prospects as it transitions its business from the sale and rental of facsimile machines to multifunctional products, and its management is shareholder-oriented. The company has guided 20%+ EPS growth in 2005.
COMPANY/BACKGROUND
Imagistics is a large direct sales, service and marketing organization offering document imaging and management solutions, including copiers, multifunctional products (MFPs) and facsimile machines in the United States and the United Kingdom. The company makes money by either renting or selling these products to large corporate customers, government entities and mid-size and regional businesses. By way of background, Imagistics was spun-off from Pitney Bowes on December 3, 2001.
The MFP product line (approximately 400mm revenues in 2003) consists of the rental or sale of MFPs which offer the multiple functionality of printing, copying, scanning and faxing in a single unit. The company views this as its main growth driver, as more companies move towards such networked digital copiers/MFPs. For the third quarter 2004, Copier/MFP sales revenues increased 8% and rental revenues increased 12.9%.
The facsimile product line (approximately 220mm revenues in 2003) consists of the rental and sale of facsimiles to its customers. As technology has evolved, the facsimile rental base and sales have declined and should continue to decline going forward. For the third quarter 2004, sales revenues decreased 10.5% and rental revenues decreased 22%.
In January 2002, after the Pitney Bowes spin, Imagistics began an estimated $50mm+ implementation of an Oracle based ERP system. To date, the company has spent approximately $73mm. As with other companies, Imagistics has run into its fair share of delays, snafus, etc. However, it is anticipated that the third and final stage of the ERP transition should be complete by the second quarter of 2005, and that continued efficiencies and cost reductions as a result thereof should flow into 2006. As a result of this implementation, SSA ballooned from313mm in 2003 to an expected 333mm in 2004e. Imagistics has indicated that SSA could eventually drop back down to the 300mm level.
Also concurrent with the implementation of the ERP system, the Company’s accounts receivable have ballooned to $111mm as the Company has delayed billing, stopped billing, reconfigured billing, etc as it transitions from its legacy system. The company has indicated that it will take
“several months” to work it back down to a normalized level.
VALUATION/THESIS
On EPS alone, the company is not cheap ($1.48 for 2004e). However, on a normalized free cash flow basis – both now and going forward – Imagistics is undervalued.
First, the Company’s after tax free cash flow has exceeded eps, as its capex has been well below its D&A due to (a) a significant decline in its cost of rental equipment as a lot of manufacturing has shifted from Japan to China; and (b) higher utilization of its rental base (they get paid on a per copy basis) as companies have moved towards a digital network. Thus, in 2003, the gap between D&A and capex was approximately $23mm, or $1.36/share. Granted, this gap between capex and D&A should decline over time, as Imagistics invests more in its MFP business, but this shouldn’t be for at least a couple more years.
Second, the company’s after tax free cash flow is currently depressed due to one-time costs and capex related to the implementation of the three-phase ERP program. In addition to the increase in SSA mentioned above, they company will spend approximately $8.5mm in capex on the ERP program in 2004. In the third quarter of this year, Imagistics spent approximately $4-5mm in rental growth capex.
Therefore, our calculation of after tax free cash flow is as follows:
2004e 2005e 2006e
Revenues 614 614 630
EBIT 47 56 75
DA 66 66 68
Less Interest (4) (4) (3)
Less Capex (60) (50) (48)
+ Bad Debt Prov’n 4 0 0
Less Taxes (19) (22) (30)
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ATFCF 35 46 63
ATFCF/Share $2.09 $2.81 $4.08
Avg. shares o/s 16.9 16.3 15.4
Note that we have conservatively estimated that the Company recovers approximately $13mm in SSA in 2005 for one-time ERP spending and an additional $11mm in 2006. We are also assuming that Imagistics will capitalize $4mm for ERP in 2005 and that capex for ERP goes away in 2006.
While on a 2004/2005 after tax free cash flow basis the Company does not appear cheap, when you add in the automatic recovery of one-time costs for the ERP system, you are creating the company at approximately 8-9x normalized atfcf. The Company has indicated that they expect atfcf to continue to be around the historical $50-$60mm annual range, though there may be near-term fluctuations given the opportunities they see in higher growth copier and multifunction product sales. Imagistics has also indicated that it has a potential growth opportunity in the sale/rental of printers, as it can leverage its current customer base and vendor relationships to enter this market.
Finally, the Company is shareholder friendly, as it has purchased stock since its spinoff and intends to continue to repurchase shares going forward.
RISK FACTORS
Collection issues on A/Rs
Further snafus in implementation of ERP
Downturn in corporate spending
Catalyst
Successful rollout of ERP program and elimination of ERP costs
Efficiency savings from ERP program
Continued growth in MFPs
New opportunities in printers