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IXYS - The beginning of an implosion?



July 13, 2007 – Comments (3)

An online acquaintance asked me to check this one out and there were things I found that I did not like.

First, from the Mar/07 financial information gross profit, or operating margin, declined from 31.6% the prior year to 24.1%.  Consider that an implosion of sorts...

The next thing I didn't like was in the year prior the operating margin was $20.4 million yet they managed $30.3 million in earnings, or $0.85/share.  That tells me something happened to grossly inflate the earnings wrt to the company's true earning potential.  My limited experience tells me this kind of thing turns out very poorly for investors.  All those investment tools investors use very wrong numbers compared to the reality of the company.

And yikes, out of the $17.9 million operating margin, only $755,000 made it to earnings, or 2c/share.

Next, there was a one time only $29.4 million gain in 2006.  Without that the operating income would have been $20 million.  Take off another $7.5 million for interest expense and adjusted taxes and you get $12.5 million of earnings.  Just using ratios, without that extraordinary item eps would have been about 36c for the year, about 4% and a P/E of 25.

That latest 2c eps extrapolates forward to a shudder in your footsteps P/E of 113.  Yuck.

Just to get a clearer picture of how this one is trending, the year before also had an extraordinary item which gave 42.8 million in extra expense or loss.  So, before taxes without this item you'd have seen $25.8 million in operating income for the year before.

The year before there were no extraordinary items and the operating income was $25.6 million.

So, a three year picture, using my corrections for those extraordinary items would be the operating income for 2005 was 10.0% of the total revenue.  For 2006 the $25.8 million operating income is 10.3%.  For 2007 it is 7.0%, a huge decline, (10.3/7)-1 = 47%.

They have reported margins from 2003 that go 21.1%, 23.2%, 31.1%, 32.5% and this last year 29.5%.

The press release blames increase bad debt, which if you dig into the financial reports was $1.3 million.  It also said they had more inventory write-offs, an additional $3 million.   

Over the last five years the number of shares as increased by 13%.  Not hugely excessive, but what did shareholders get for that dilution?  If you read the press releases about share buy backs wouldn't you expect to see less shares?  Actually, the share count in millions from 2003 went 30.9, 32.4, 35.1, 33.6, 34.8, so 3.4% increase in share count from 2006 to 2007 when they have a share buy back program happening?

Seriously, $18 million spent on a share buyback, that should be about 2 million shares less.

They add an extra 1 million shares per year to those available for options.  That's in the range of 3%.  Consider inflation to be 3%, that means earning need to increase by 3% per year to keep up with the time value of money.  At 3% you essentially break even.  Well, with 3% dilution per year you need to increase earnings by an additional 3% to break even, or essentially you need 6% earnings.  Alternatively you could hope that they keep 1 million times the share price available for share buybacks every year to pay for the true cost of the options.  At the current price that's 3.2% of last year's total sales, and 3.2/29.5= 11% of the operating margin or gross profit.

The financial reports show 35 million shares as of March 31, 2007 and 5 million available to grant for options and 4.5 million options granted outstanding.  That's 32% of existing hidden dilution.

I'm looking back at some of their plans.  They had a plan to offer $60 million of convertible senior notes and use part of the proceeds to buyback $20-30 million of its common stock.  Help me to understand that this wasn't anything but a scam the retail investor plan to pump up the share price?  I don't get how that adds value for investors in any way.  You are buying shares on one hand and issuing them probably cheaper through convertible debt.  Institutions usually want some kind of premium for their backing.  It serves no purpose except to temporarily pump up the share price.  I take that to mean someone is looking for a handsome, stick it to the retail investor, exit price.

And what else, oh yeah, the outlook is that sales should decline by 3-6%.  

Guidance lowered

3 Comments – Post Your Own

#1) On July 14, 2007 at 9:09 AM, rd80 (96.64) wrote:

Thank-you for an excellent example of analyzing a stock.

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#2) On July 14, 2007 at 5:18 PM, dwot (29.44) wrote:

Thanks for the comment.  It is always nice to know people are reading your work.

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#3) On July 14, 2007 at 9:11 PM, MakeItSeven (31.26) wrote:

They had a one-time problem: "fiscal fourth-quarter net income fell sharply despite higher sales after a key customer left debts unpaid when it went bankrupt.".

That explained for most of what you observed, from poor operating margin to a bad earning profit. 

Problem #2 is that they lowered their current quarter revenue from 74M to a range of  70-72M and operating margin to the range of 27-30%.  After losing a customer, that's fair enough.

I don't know why they wanted to issue the bonds either but they have cancelled it so that's rather moot unless we're trying to read into their "intention".  It's one of the fastest growing companies, after all, and those companies sometimes need capital to expand, or to invest in the company's shares if they think the prices are unfairly beaten and that's the best investment they can do.

Options are fairly common in Silicon valley.  The dilution is already factored into the future EPS which is expected to grow by 53% this year and 39% next year.

At the current depressed price, it's selling at 1.6x book value.  Taking some of that book value out of the share price, then you can have a Top 100 fastest growing company in the US according to Business 2.0 magazine at a fire sale price.  There's some risk and that's why the price is low.

The one and only analyst following the stock has raised the rating from Sell to Hold recently, I guess after the company spelled out what to expect for this quarter.  I would rate it a Hold also.  It all depends on how they do this quarter.  Personally, I might even consider a speculative Buy with a little play money just so I can keep track of it to see how things go but I won't recommend that to anybody.

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