Description

At only $2.58 per share, Iomega (NYSE: IOM) is at a five year low. Now is the time to be a bottom feeder.

As you may know, Iomega is that company that manufactures Zip drives, those portable storage devices that hold 100 MB disks. (And now they have 250 MB Zip drives as well.)

As a value investor, you will be interested in knowing that Iomega has $373 million in cash and short term investments, and only $38 million of long-term liabilities. Market cap right now is $703 million, so if you are wondering how much further IOM can fall, the answer is that it can’t fall much further. And unlike internet companies that are burning up their cash, IOM has had 6 consecutive profitable quarters.

Iomega’s current PE ratio of 5.5 overstates the company’s profitability because it includes non-recurring tax benefits. Nevertheless, with $0.04/share profit in the first quarter of 2001, a difficult quarter for companies selling computer stuff, and $0.08/share the previous quarter, this puts Iomega on track for earning $0.24/share on an annual basis. Analysts predict $0.22/share for the current year. At $0.22/share, Iomega has a PE of 11.72. So clearly IOM is not an overpriced stock based on it’s current earnings.

The reason why Iomega’s stock has not performed well recently, despite 6 consecutive profitable quarters, is that (1) revenues are decreasing, and (2) the company’s core product, the Zip drive, is seen as on the decline, being replaced by CDRW drives.

But Iomega has not given up. Zip and Jaz drives continue to be profitable. Iomega now also sells CDRW drives, and will soon be selling it’s own branded compact flash and smart media for digital cameras and other portable electronic devices. Iomega has just released it’s new Peerless drives, which are portable and hold cartridges of 5GB, 10GB, or 20GB. They are a lot faster than a CDRW drive, and hold a lot more data. With files getting bigger and bigger, especially with the growth of digital movies and digital photography, there will be demand for storage alternatives. With Iomega’s brand and distribution channels, it has the ability to get its products in front of consumers, a luxury that few other manufacturers have. (Go into any store that sells computer stuff, and you will see Iomega products. In fact, the brand and the distribution channels makes Iomega an attractive takeover target in my opinion... all that plus $373 million in cash and profitability.)

Iomega’s stock took a plunge when it was announced on May 21 that Bruce Albertson, the CEO, resigned (or more likely was forced to resign). The stock dropped from $3.48 to $2.81 in one day, clearly an overreaction to the news. (And then continued to drop another $0.25 or so, but it looks like it has bottomed out at around where it is now) This creates a buying opportunity for us savvy bottom feeding value investors.

Catalyst

I am betting that the drop in the stock price after the resignation of the CEO is only temporary, and if I hold on for a short time, the stock will go back up above $3.40 where I will probably sell it for a quick 30% profit. If we are really lucky, a company like Dell will make a takeover offer. With profitability and $373 million in cash, I think it’s intrinsic value will support at least the current stock price, so the upside potential exceeds the downside risk.