Thursday, July 17, 2008
The Smart Profits Report Isue 541
by Paul Moore, Technology Specialist, Smart Profits Report As the stock market continues to stumble its way through the dog days of summer, many investors are searching for companies with “rocket-like” potential that can defy the broader market trend and just go about their business. One company that boasts this rocket-like potential is one we’ve held in our Xcelerated Profits Report portfolio since late 2005. And it’s already turned the potential into profits for longtime subscribers – a 117% gain on the first half of our position, to be exact. A little over a year after bagging those profits, Immersion (Nasdaq: IMMR) remains loaded with potential, but still somewhat on the launchpad. As a small-cap company, it’s still volatile, so the stock market’s breakdown hasn’t helped its progress in trading terms. But the promise of its industry (“haptics” – i.e. touch-screen and force-feedback technology) is tremendous and has received much greater press from the iPhone. Let’s take a look at this fast-growing trend, its future outlook, and where market leader Immersion is headed from here… The Technology Behind The Potential While Immersion has met its financial expectations, the mass adoption curve for its technology has been pushed out and has overlapped a point in time where high beta stocks have been stripped of premium valuations. That said, we believe the underlying fundamentals remain intact and the stock is attractive here. In case you don’t know about Immersion’s industry, the company is a market leader in the field of haptics – a technology that simplifies and enhances human interaction with everyday technology. The company holds hundreds of patents and provides products and patent licensing to some of the world’s biggest firms. We’ve already seen the first wave of enthusiasm, as Immersion’s technology is incorporated in cutting-edge consumer electronics products like cellphones (Immersion’s patented VibTonz software is already in Nokia (NYSE: NOK), Samsung, and Motorola (NYSE: MOT) handsets) and Sony PlayStation video games. However, the company’s smaller segments (mobility, gaming, and automotive) are enjoying faster growth at the moment and offer the most opportunity. And as this technology matures, it will filter into products with lower price points that have mass appeal. At that point, IMMR’s top line will have the potential to grow exponentially in line with unit shipments.
Medical Division Set To Spring Back To Life, While Other Segments Rise Rapidly While the consumer products receive most of the attention, the bulk of Immersion’s revenue actually comes from medical training devices that help surgeons learn their craft. That core business has slowed in the US recently, but a push to expand in Europe and Asia is likely to reaccelerate revenues from this segment later this year. And even as its Medical division has slowed, Immersion has managed to offset that through rapid growth in newer areas. For example, strength in the Mobility division saw sales shoot up by ten times during the most recent quarter and now accounts for 13% of revenues. And looking ahead to the remainder of 2008, there is plenty to be excited about… The Buyer’s Favorite Word
Right off the bat, three major industries are set to toss more business Immersion’s way:
- Auto: BMW is expanding the use of iDrive into its 3-series models.
- Telecom: Samsung and LG are shipping handsets that leverage haptics and Nokia is expected to follow later this year.
- Gaming: 3M is producing casino gaming screens, which could offer upside over the second half of 2008.
That’s the business end. But what about the stock’s valuation? In a word: Cheap. While the concept of buying low and selling high is a mainstay of investing, every now and again, this simple concept temporarily eludes investors. That explains why Immersion trades for less than two times its net cash. In the software industry, buying a profitable company at that price is relatively unheard of. But at a time when fear is rampant, you occasionally get the opportunity to snag a bargain. In Immersion’s case, it boasts $4.52 in net cash per share. This is in cash equivalents that could be quickly liquidated if a majority holder were to buy the company. This basically means that if a third party such as Sony or Apple or Oracle were to buy the company, it would be getting the operating business and patent portfolio for $2.30 per share (assuming a $6.82 share price). When stocks get to these levels, it becomes cheaper for a partner to acquire the firm than pay royalties for the licenses. The Big Boys Bailed Out… But Are Now Getting Back InUnless you took a vacation from the planet over the first three months of the year, you’ll probably know that it represented the worst start to the year for the stock market, as gridlock in the credit markets plunged financial institutions into dire straits. That goes some way to explaining the unusual selling pressure that Immersion endured during the first quarter. For example, Immersion’s largest holder, Goldman Sachs (NYSE: GS), all but liquidated its position over that period. Goldman sold 78% of its 3.1 million share position and if you assume that the firm sold those evenly throughout the quarter (a measured program of selling, rather than panic), it accounted for 5% of the daily volume each day. This represents a significant hurdle for a stock to overcome in a stable market, let alone a panic situation.
Since then, however, big institutions have ramped up their buying of Immersion shares. Two large shareholders have stepped up big-time, with Balyasny beefing up the size of its position by 131%, while Immersion’s largest current shareholder, Mazama, has bought 23% more stock. This represents a strong vote of confidence from institutions that are intimate with Immersion’s story and have combined to own 15% of the shares outstanding.
Here’s The Skinny On Immersion’s Plan To Fatten Up
To sum up, Immersion has its finger on several different developing markets that have the ability to dramatically increase its growth.If one of them catches fire, investors will benefit from accelerating profit growth and multiple expansion. Additionally, Immersion remains a buyout candidate for the likes of Sony or Samsung and a precedent was set earlier this year when Nokia acquired Navteq. The downside scenario would be if Immersion’s share price stagnates at current levels. That could happen if increasing pressure on consumer spending delays the adoption of devices using haptics. However, the low valuation would likely still provide support for the stock and you’d merely sacrifice opportunity, which is much better than sacrificing investment capital. Best regards, Paul Moore
P.S. With 117% profits taken on the first half of our Immersion position, the second half remains in the Xcelerated Profits Report portfolio. While this is clearly a difficult time for most companies, battling against weakening economic growth and soaring inflation, Immersion’s technology is the real deal and as a market leader, we remain confident about the firm’s future prospects. P.P.S. Speaking of the Xcelerated Profits Report, we’re almost ready to unleash the August issue to existing subscribers. In it, healthcare expert Marc Lichtenfeld gives six reasons to buy a fast-growing medical device maker that is defying the current broader stock market trend, while commodities specialist Lee Lowell makes an ultra-contrarian recommendation, showing two professional ways to play its downside. Click here to find out how you can join the team and claim some profits for yourself in this wild market. Today’s Smart Profits Notes: Apple’s (Nasdaq: AAPL) iPhone buzz has certainly thrust touch-screen technology onto the front pages. In case you haven’t seen one, there are no buttons. Instead, all the user’s commands are computed via an interactive screen that responds to touch. This is Immersion’s core business – and is expected to be a $1.8 billion market this year, compared with $900 million in 2006.
Just one week from today, we’ll have a better idea of how Immersion is faring in the current market. The company will release its second-quarter earnings results on July 31. As I said in my debut column on technolgy sector investments last week, cash is king in a market like this – and Immersion is in a strong position, with $140 million in the coffers and no debt.
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