Description

Perceptron Inc (PRCP)

Price:  $5.72

Mkt Cap: $56 MM

Ent Val: $51MM

EV / NTM Sales:  .7x

EV / LTM / 20 / 21 EBITDA:  16.6x / 9.6x / 8.3x

Tangible BV / Share:  $3.96 / 1.4x

Price Target:  $9+ (trading), $10-15 (transaction) – 60% to 200% upside from current levels

 Situation Analysis

·    Perceptron Inc. (PRCP or the “Company”) is an industrial technology provider of laser guided metrology solutions for dimensional gauging, inspection and scanning primarily to the automotive sector.  Key products include 3D machine vision solutions, robot guidance, measuring machines, laser scanning and analysis software which are used for quality control and inspection applications on or near the production line.

·      PRCP is a niche player (over 50% share) with a strong 38-year reputation for quality and accuracy among automotive OEMs around the world.  Products improve auto manufacturing quality, line efficiency and cost.

·       While a tech company at its core with dominant market share, PRCP’s share price has suffered due to its exposure to the automotive sector however trades at a third of the value relative to its metrology peer group.

·     After reporting six quarters of close to $20MM of revenue and segment profitability in the 5-8% EBIT margin range, PRCP hit an air pocket in CY Q1 - bookings were shifted to the right due to a sluggish macro along with a general industry pause on capex as OEM’s plan for next generation vehicles (EVs and self-driving).  While such trends provide longer-term tailwinds for PRCP, these factors have created some near-term order volatility.   

·     The recent dislocation in PRCP’s share price has created an attractive entry point to own a profitable, high-quality business with cutting edge technology used for mission critical applications, strong customer relationships and a clean balance sheet.  The stock is favorably valued on an absolute and relative basis. 

Why Now?

·      Prior to about three years ago, former management rested on the laurels of PRCP’s technological superiority in the market and failed to innovate.  During that time, competition caught up and put pressure on pricing.

·     Under the guidance of a refreshed board (led by activist Harbert Management who recently doubled their position), PRCP restructured its R&D efforts and invested significantly in new technologies. PRCP believes its new products have leapfrogged existing tech in the space by 2.5-3 years.  PRCP's new AccuSite optical tracking solution provides continuous measurement on the production line as opposed to older measurement methods that entail taking parts / cars off the line, performing measurements and then having a team of engineers crunch numbers to determine what needs to be fixed on the line.  As one can imagine, older methods of measurement not only allow for greater defects but are also materially more expensive than continuous measurment.

·        The merits of PRCPs new technology portfolio have begun to bear fruit with several new order announcements including some for EV production. The Company has also begun to knock out competition including a substantial win with prominent German OEM.   

·       While the automotive macro backdrop exacerbated by trade war concerns do present near term headwinds, broader longer term drivers of demand for PRCP’s tech are extremely compelling:  1) New model builds (EVs and autonomous vehicles), 2) Vehicle line extensions (think BMW 1,2,4 series) and 3) OEM factory redesigns to improve automation, efficiency and quality on the production floor.

·      PRCP's new Chairman, Jay Freeland joined the Company in 2H18.  Freeland was formerly the Chairman and CEO of FARO Technologies, a $900MM metronomy company he was responsible for growing.  On PRCP's Q3 conference call, Freeland along with the Board have embarked exploring strategic options including potential divestitures and strategic partnerships.  Since Freeland joined the board, a few announcements have been made and we should expect more to come.  Ultimately, it is likely this Company is purchased by a larger player looking to obtain immediate access to PRCP's tech and reputation within the auto sector.  

Company Overview

·        Headquartered in Plymouth, MI, 12 locations across the globe, 330 employees, 2,700 active installations.

·        PCRP sells directly or automotive OEMs and / or manufacturing line builders, system integrators or assembly equipment manufacturers.    ASPs for systems range from around $150K to $1.5MM.

·         Key Products:  Fixed and robot-mounted laser gauging and scanning systems used in automotive OE manufacturing and component supplier plants. Brands include AutoGauge, AutoFit, AutoGuide, Helix, Coord3, TouchDMIS. Products are installed In-Line (integrated into the production line), Near-Line or Off-Line (parts inspection on a bench top, for example).  

·        Solutions are generally customized that integrate sensors, software, robots and assemblies that measure parts as they are placed in a vehicle as well as robotic assembly solutions that automate the assembly process.

o    Robot Guidance Solutions are mounted onto industrial robots and capture measurements of robotic positioning in relation to parts being assembled and processed during production.  Such systems lead to less production errors and reduced production costs.  

o    Gap and Flush Systems used to automatically measure, record and display the gap and flushness of parts most visible to the auto consumer (gaps between rear doors, hoods, fenders, quarter panels, etc.).  Such systems provide the ability to make fast and accurate audit checks and supplant the use of traditional handheld tools for inspection.

·       Rev by Geography:  45% Europe, 33% Americas, 22% Asia.  Rev by Customer:  VW and GM represent 13% and 11% customers respectively with 32% of total sales to four auto OEMs. 

·        Competition includes Carl Zeiss Ag, ISRA Vision AG, Mitutoyo and Hexagon in certain markets. Other players in portable technologies to be used in industrial technologies includes FARO Technologies, Topcon and Trimble Navigation.   It is believed that PRCP has over 50% share in the inline dimensional measurement market. 

·    Fundamental Drivers include new product / platform launches, retooling of manufacturing lines, line extensions, electric vehicles (EV’s), SUV introductions, etc.  Continued gradual shift from use of manual hand-held gauges to automated inline measurement solutions has increased over the past five years. 

What is of Value? / Investment Case

·         Decades of customer relationships and a strong reputation with best of class tech in a niche market segment.

·         Emergence from a three-year product refresh cycle with tech that is years ahead of the competition with clearly defined benefits in its use cases.

·         New products (AccuSite, Robot Guidance and Gap and Flush systems) provide tangible efficiencies, quality improvement and cost savings opportunities for customers:

o    Old quality control techniques take a sample of cars off the line, have engineers make calculations then calibrate / fix the line accordingly –a very manual, time consuming and non-perfect process. 

o    PRCP’s 100% measurement products and tech allow for continuous measurement and testing that immediately detects non-conforming parts for immediate fault detection and correction action that leads to better quality, less downtime and ultimately lower costs to the manufacturer.  

o    The data collected on the line can then be used to enhance applications to further improve efficiency.

o    New products are significantly accretive to current gross margins (beyond high 30s).

·      Management sees previously untapped opportunities to expand PRCP’s addressable market by leveraging tech in tangential market segments that require precision (Tier 1,2 parts suppliers, Aerospace, Manufacturing, etc.).

o    Leveraging PRCP’s tech and support footprint should lead to incremental margin expansion from here.

·       Fully engaged board (largest investor owns 10% with two seats) and recently appointed Chairman (former CEO of FARO Technologies) are committed to creating shareholder value.

o    On its 9/30 call, management announced a strategic review that may include divestitures and / or business partnership opportunities – essentially all options on the table within a relatively short order (next couple quarters).    Less likely but this could also culminate ultimately in an outright sale.

o    The recent departure of the CEO Dave Watsa (who was the former CFO) provides an opportunity for new leader to take the Company to the next level.   A search is currently under way.   

·        Mispriced security that is cheap on an absolute and relative basis:

o    Trades at 1.4x TBV and .7x revs vs metrology peers that trade at a minimum of 1.9x sales.

·       Ultimately PRCP represents an attractive M&A candidate for a whole host of metrology companies who want immediate access to most of the major automotive OEMs as well as PRCPs improved product offerings.

What Needs to Go Right?

·        Continued momentum with new products bookings.

·        Executing on gross margins of 40% or higher – this can be achieved through larger mix of new product sales and sales in tangential markets (tier 1 or 2 auto parts, aero, manufacturing, etc.).

Risks

·        Prolonged macro slowdown.

·        While balance sheet is clean, somewhat hamstrung to deploy meaningful growth capital.  This can also be an opportunity for the right capital partner.

·        Competition catching up (though buy vs. build seems more likely given the niche nature of the market).  Key competitors in PRCP's vertical includes Zeisss and ISRA Vision AG.

Valuation Considerations

·         Absolute Value Considerations

o    Trades 1.4x tangible book value with no debt.

o    Trades at 9.6x and 8.3x EV / FY 2020 and FY 2021 EBITDA, respectively at an FCF yield of 6.3-7.5% which is reasonable for a business with majority market share and technological barriers to entry.

·         Relative Value Considerations

o    While there is no pure play comparables, metrology companies that include Hexagon (Sweden), Omron, ISRA Vision AG, FARO Technologies, Cognex and Cyberoptics trade at a range of 1.7x - 11.4x (3.4x median) EV / Revenue and 12.7x-41.5x (17.3x median) EV / EBITDA.  At present, PRCP trades at 0.7x revenue and 8.9x 2020 EBITDA which represents a material discount to peers

Catalyst

Catalysts

·         New CEO with an ability to drive the company to the next level.

·         Continued bookings and backlog growth.

·         Takeout / M&A.

·         Strategic alliance / partnership, capital infusion to grow business, etc.