Description

This is not an idea with a miniscule market cap,something that you can't buy,a leveraged EBITDA story,or a short you can't borrow.Just a decent company,that has grown at a nice pace,has a great balance sheet,lot's of free cash flow,and trades at a cheap valuation.

Planar Systems operates in the flat panel LCD moniter business.Products range from display systems to display components for the medical,commercial,and industrial markets.Major customers include Dell,CDW,GE Medical,Kodak,Phillips,Diebold,and Siemens.Revenue growth the last 3 years has been 14% compounded and operating income has grown 35% compounded.

For the year ended Sept '03 the company had 250MM in revenue,broken down as follows:
-Commmercial 97MM or 39% of total,Planar sells over 30 models of branded LCD,PLasma TV's,and desktop moniters.Company is selling over 25,000 units a month,uses Asian manufacturers,has the #9 market share in the US,and uses major resellers Dell,PC Connection,PCMall,and CDW Computer.The large unit volumes help drive costs down which the company uses to gain share.Revenues grew 70% y/y and has gross margins of 10-12%.
-Industrial 66MM or 26% of total,revenues down slightly y/y,growth rate should mirror GDP.Company sells high performance displays such as ATM panels,jet cockpit panels,touch panels,etc.All very durable,rugged,and temperature tolerant.Division is highly profitable due to low panel cost's from economies of scale in commercial business,generates lot's of excess cash.
-Medical,the third and final division did 89MM in revs,35% of total.Growth comes from medical imaging displays,CT scanning displays,digital XRay displays,and MRI displays.All of the film based Xrays and photographs are now being moved digitally in hospitals.This business segment has 15% growth and high margins.

To adress valuation,company has equity cap of 245MM,cash of 45MM,debt of 10MM for EV of 210MM.Company generated 25MM of free cash(NI+D&A-capex)in FY'03.Projections for FY'04 are 275MM in revs,operating margins of 9%,and eps of 1.00 p/s.D&A runs 8MM,cap ex 3MM,for free cash of 20MM.Stock trades at virtually 10x FCF,6.5x EBITDA,and low teens multiple of eps net of cash.A year from now company will have 65MM in cash or nearly 5 bucks p/s,one third of stock price.Company has stated they will look for accretive acquisitions if they can find them,primarily in the medical segment.

So why is stock down?Last quarter company missed on the medical side.The demand for LCD moniters and LCD panels for TV's caused supply shortages.Company was locked into supply arrangment that could not be met,and they could not deliver,therefore lost share to lower priced competiton.They could not requalify certain suppliers in the medical segment fast enough allowing competitors to steal share.PLNR needs to come back with strong strategy and decisive plan to regain momentum.Over the last few months they have devised plan to roll out new line of lower and mid-range products,cut costs out of supply chain to maintain margins and to exploit the technological advantages they have,in an effort to get back share and restart growth in the medical area.

What is upside if they are succesful? Before the miss analysts had 1.50 est for FY'04 and 40 dollar targets,or 26x eps.We can purchase the stock for a 10% FCF yield,if in one year the FCF yield is 6% on 20MM,plus 65MM in cash,the stock would trade at 26-27 dollars.Obviously if the plan works,eps will be higher then 1.00 p/s,higher free cash,higher multiples due to growth,and analysts could have targets over 30,stock could be easily 50-100% higher.Downside appears limited with cash on balance sheet growing and free cash from business.

Catalyst

1)Upcoming marketing trip to Boston,company should start to talk about early results from their regrowth strategy,should get institutional accounts interested.
2)Company should see results by April 14th conference call for 2q(March) and offer more color on how business is doing.

3)This should get analysts more comfortable leading to some upgrades on valuation and eps should start moving higher and investors focus on possible 1.30-1.50 eps in FY'05