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The burden of putting the word "smart" in your name, as the founders of Smart Technologies Inc. did, is that when you do stupid things, you look even more foolish.

Such as when you set sky-high earnings expectations out of the box as a public company, then miss them. That's what the Calgary-based maker of electronic classroom whiteboards did in 2010. The result? Smart Technologies was one of the worst-performing initial public offerings of the year, and management has investor lawsuits both in the U.S. and Ontario to deal with.

What it also means, however, is that Smart Technologies stock, beaten down from its busted growth story and pessimism over U.S. education spending, is priced for a long-term gain. At under $10 a share, it has a price-to-earnings ratio of less than eight times trailing earnings - and yet still has the potential for double-digit revenue and earnings growth.

Founded by husband-and-wife team David Martin and Nancy Knowlton, Smart Technologies introduced its first interactive whiteboard two decades ago and has become the market leader. It does have competition, notably from U.K.-based Promethean World PLC, but "as a sign of its dominance in the space," notes BMO Nesbitt Burns analyst Brian Piccioni, "interactive whiteboards in general are often referred to as 'smartboards.' " Smart Technologies is believed to hold nearly half the market.

Its July, 2010, IPO was the largest of the year at that point, but there were already warning signs that the $17-a-share (U.S.) price was too lofty.

Debt Load, Sales

The company kept just $140-million of the $660-million it raised; the rest of the offering came from the company's financial backers shedding a significant chunk of their stakes. That meant Smart Technologies didn't have the funds to make a major dent in a debt load of more than $500-million.

More importantly, there were questions as to whether the company could build on or even maintain the 43 per cent annual revenue gain it just reported, since the company benefited from the U.S. federal government's school technology stimulus money.

Alas, just four months after the IPO, Smart Technologies had to cut its revenue guidance for the year by 9 per cent, or $80-million, and the shares sank to around $9, where they remain today.

As disappointing as that announcement was, however, the new sales guidance still represented revenue growth of around 20 per cent from the prior year. Revenue for the first three quarters of its fiscal year topped the previous period by 26 per cent. (The company's fiscal year ended March 31; fourth-quarter results are to come.)

While gross margins are up, profitability is down, per generally accepted accounting principles, largely due to currency exchange rate issues. Free cash flow remains positive, sufficiently so to continue paying down the company's significant debt. And the company's preferred "adjusted EBITDA" metric, which wipes out the foreign currency factors as well as stock-based compensation expense, is up more than 25 per cent.

Stock Priced for Rough Times

This amid an awful time in U.S. education, where Smart Technologies is looking for many of its new customers. While whiteboard penetration tops 80 per cent in the United Kingdom, it's roughly 30 per cent in the U.S., and below 10 per cent elsewhere in the world, estimates CIBC World Markets analyst Todd Coupland.

Smart Technologies "remains a conundrum," says BMO's Mr. Piccioni, who has a $9 target price on the stock. While "the company appears to be the most successful player in its target market and teachers are strong advocates of its products," he says, "we believe it is likely [the company's]key growth market is at the same time approaching maturity and facing significantly less funding for education technology … We believe caution is called for."

Smart Technologies' stock seems priced for the most pessimistic of forecasts for U.S. school spending. But while the U.S. federal government is indeed likely done stimulating the economy, local school districts have the power to go to voters for funding of technology programs, a request likely to be far more palatable than more money for teacher compensation.

And CIBC's Mr. Coupland, who has a $17 price target, says "investors should keep in mind that Smart Technologies executed very well in [the third quarter]and its profitable dominance of this market remains well intact."

The company will offer new revenue guidance in the coming weeks. Investors willing to bet that schools will continue to buy market-leading technology and that Smart Technologies has put its revenue misses behind it may end up looking … well, smart.

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