The first two bullish posts talked about shareholders controlling the firms destiny and INFS having the balance sheet required for a turnaround. This post will concentrate on valuation.
Since we are in the early innings of the “turnaround” and its impossible (at least for me) to estimate future cash flow, the only relevant way to value this company is by trying to calculate an acquisition value.
Lets see what this pig is worth ……fist lets look at the tangible liquidation value
Cash & Equivalents ……. $78M
Net Receivables …… $35M (reported $47M, discount by 25%)
Inventory …… $18M (reported $36M, discounted by 50%)
Other CA $9M
Current Liabilities……. ($83M)
Other LT Liab ……. ($4M)
Tangible Liquidation Value …$53M or $1.33M per share
Value of Motif* ……. $23M (50% share of 15x 2006 net income of $3.1)
Non-Cancelable Leases….. ($17M)
Revenue from Sub-Leasing** …$8.5M
Intangible Liquidation Value …..$10.2M (total intangible value $14.5M discounted by 30%)
Total Liquidation Value $63.2M or $1.60/sh
Current Market Value $97M or $2.44/sh
*Motif is a 50/50 JV with Motorola. Net income in 2006, 2005, 2004 has been $3.1M, $7.3M, $4.7M respectively (note 12 in 2006 10K).
**INFS currently sub-leases some the properties it liquidated as part of the restructuring. To be conservative, I assumed they could sub-lease their current properties at 50% of what they are paying.
What is not included in this liquidation value but is worth something to an acquirer?
1) by far the biggest thing that is missing from $1.60 liquidation value I calculated above is the over $200M in NOL’s that INFS is currently carrying. The problem is that you can’t just discount the $200M and add it to value of the company because the nature of tax laws give different acquires different abilities to use the NOL’s. On the last conference call, the CFO (who is no longer with the company) said that much. However, he also said that to the right buyer the NOL’s have real dollar value.
How much could they be worth? Well, lest say the acquirer can only use 50% of the NOL’s over the next 10 years. Discounted at 6%, the PV is $56M or $1.41/share.
2) another exclusion from the above liquidation value is INFS “intellectual property” (patents, R&D department, brand name, etc.) and its reseller network. While its hard for me to assign a specific dollar value to the company’s intellectual property I think it has a value of more than zero. Despite its problems, INFS still has patents and the know how to make high quality projectors and I feel that this technology is worth something to a potential acquirer. They also have years of relationships with resellers and do posses shelf space that has a tangible dollar value to an acquirer.
I am not going to spend a lot of time talking about the “brand name” even though they state (very often) that they have the largest installed base of projectors and leading brand name. I think its pointless to talk about your “brand name” when you have seen ASP’s fall by double digit rates over the last 4 years– obviously your brand name is not very strong.
So what does this all mean?
Well, I think at the current market price of $2.44 per INFS share you are getting $1.60 of tangible liquidation value as wells as $200M+ of NOLs and the company’s intellectual property which I think is worth over $1.50 per share – even if the acquirer can only use half of the NOL’s they are worth $1.40/share by my calculations.
Obviously INFS is a very high risk investment in the early stages of a shareholder led transformation, but at current prices you are paying a discount to acquisition value.
The next post will conclude my analysis of INFS.
* DISCLOSURE: I or accounts I manage may be long or short any and/or all stocks mentioned in this post. This is not a recommendation to buy or sell any security. For informational and educational purposes only.
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