Description

InFocus Corporation is the world’s leading digital projector manufacturer but is valued as if it is going out of business any day now. The company makes projectors used for business, government, and educational institutions, as well as a small but rapidly increasing number of consumers. The company is headquartered in Wilsonville, Oregon and the company’s products are marketed under the brands InFocus, Proxima, and Ask, as well as Toshiba through an OEM relationship.

While INFS is likely to post moderate losses in the mid-term, this is more than discounted in its price; at $6.16 the stock is trading at 74% of its tangible book value of $8.28. With $110m in cash and equivalents, the company is far from being in desperate financial straits. Why then is this industry leader trading at almost a 10% discount to liquidation value (current assets minus total liabilities) of $6.74?

The projector market is growing rapidly, expected to grow from 1.3m units in 2001 to 2.8m in 2004 according to industry estimates from iSuppli/Stanford Resources. Other more bullish estimates look for a 41% CAGR over the next three years as consumer adoption takes off. Consumer awareness that front projectors can offer a movie theater experience for less than the price of new big screen TV is only just beginning to emerge. However, projector prices are declining almost as quickly as the market is growing, leading to projected revenue growth between 5-10%.

The projector market is moderately fragmented, INFS is the number one manufacturer with 16% of the market, down from 22% in 2001. Competitors include Japanese brands such as NEC, Epson, Sanyo, Panasonic and Sharp, as well as emerging competitors Dell and HP.

INFS’s share price peaked at $60.25 in late 2000 and ever since INFS has been hurt by the massive slowdown in corporate spending, rising competition, and turbulent stock market. In response INFS has fought to increase penetration of the government and educational markets, improve their products, and to reduce costs. From peak revenue of $886.7m in 2000, consensus is for INFS to bring in $637m in 2002. Over three years from 1999-2001, INFS earned $3.45/share (a rarity for a tech company), while in 2002 it is expected to lose 46 cents.

But the picture is not as bleak as it seems. Although INFS lost money on a net income basis, operating cash flow has been positive for five consecutive quarters. The company is making real headway in reducing costs; aside from personnel cuts, INFS has outsourced nearly all of its manufacturing to Flextronics and Funai of Japan. The first product of the Funai partnership is the X1, a $1500 multi-purpose projector that targets both the home and corporate market by combining strong business performance with excellent home theater/HDTV video capabilities. This product has a groundbreaking price/performance ratio and has outperformed expectations in the two months since its launch. If the company can continue to execute this well all doubt about its ultimate survival should disappear.

In addition the company has begun supplying Chinese TV manufacturer SVA with light engines for projection televisions. While not expected to be a big revenue generator in the near-term, this entrance into another segment of the home entertainment business bodes well for the future.

With modest growth in new markets and a moderate uptick in business spending it is not hard to see INFS return to annual earnings of $1/share. It's of course tough to predict when we will see such a capital spending turnaround, but the company's strong financial position allows us to be somewhat patient in this regard, offering a very attractive risk/reward.

Strengths:

Projector market leader in market share, brand equity, and technological innovation

Respected and trusted management team

Strong balance sheet ($8.28 tangible book, $2.80 in cash)

Leading charge into high-potential consumer entertainment market


Weaknesses:

Declining ASPs (6% in 3Q02)

Japanese pricing aggressiveness, emerging Taiwanese manufacturers

Levered to still stagnant corporate spending environment

Catalyst

- Cost-cutting results start to emerge, on road to return to profitability
- Any improvement in business technology spending
- Strong new products, burgeoning consumer adoption of front projectors for home theater use
- Strengthening yen hurts Japanese competition