Writing my midyear look-back column last week gave me the opportunity to review all the calls I’ve made in Vox for the year-plus I’ve stewarded this column. The worst pick has been the Calgary technology company Smart Technologies, which has dropped 80 per cent since my buy call in April, 2011.
The thesis? The maker of interactive whiteboards and projectors for classrooms, at less than eight time trailing earnings, was cheap. I believed fears of deep cuts to education-technology spending in the United States, the company’s largest market, were overblown.
Alas, they were not.
But at the risk of parodying myself – hey, if you like it at $10, you gotta love it at $2! – I remain intrigued by the company.
The recovery potential for investors who bought in a year or more ago (the company did an IPO at $17 U.S. in 2010) is completely unclear. But if you’re not already a shareholder, there’s not much left to lose if you’d like to gamble on a company that continues to lead the market in its space and trades at four times forward earnings.
First, let’s look at what went wrong. After several years of revenue growth of 20 per cent or more, Smart Technologies posted a 5.6-per-cent sales decline in the year ended in March. Earnings per share, $1.61 two years prior, came in at 26 cents.
Sales to U.S. school districts indeed declined, but in the company’s most recent quarter, sales in international markets fell as well, almost completely crushing the growth story.
The company’s co-founders, who sold their first whiteboards in the early 1990s, were ushered out of their management positions earlier this year in order to bring in a fresher vision. New executives have scaled back the company’s guidance due to poor earnings visibility, but what they have said suggests more revenue and profit declines in the near term.
Unsurprisingly, the analysts of Bay and Wall streets are reluctant to recommend companies with falling sales and little idea of when the trend will turn around. Only three of nine analysts have “buy” ratings, according to Bloomberg, with five “holds” and a “sell” making up the balance.
At the same time, shares have fallen so far that they’ve outstripped the target prices of some of the pessimistic stock-watchers.
Take Tal Liani of Merrill Lynch, who has an “underperform” rating after the most recent quarter. He uses a multiple of enterprise value (net debt plus market capitalization) to sales to value Smart Technologies. At 0.8 EV/sales, he comes up with a valuation of $2.85 (for the Nasdaq-listed shares, versus current prices of roughly $1.80.)
Like Mr. Liani, Katy Huberty of Morgan Stanley, who downgraded Smart Technologies from “overweight” to “equal-weight” in February, worries that Smart Technologies can’t even meet its own reduced guidance, and warns of a “bear case” where the shares trade at $1.50 apiece.
Her “base case” projection however, is a price of $4, eight times projected current-year earnings of 50 cents per share, and a potential bull case of $6, or slightly over eight times earnings of 70 cents. (The EPS figures Ms. Huberty is using are not calculated according to generally accepted accounting principles.)
Despite the short-term challenges, Ms. Huberty “continue[s] to believe in the long-term story of rising Interactive Whiteboard penetration in developed and emerging markets.” Smart Technologies is believed to have roughly half the existing global market, and is making inroads into the corporate sector as well.
One of the worries about Smart Technologies is that schools will abandon its products and shift to tablet-based learning. My take? In the recent quarter, the average selling price of the company’s whiteboards, which serve the full class of 30-plus students, was $1,300.
If schools are as cash-strapped as they seem from their recent spending, it’s hard to imagine them stuffing iPads in their students’ hands at $400 or more apiece.
Last time around, I suggested investors who bought Smart Technologies could end up “looking smart;” there are too many problems to suggest that again.
At this point, though, there’s so little left to lose that buying today – “risky,” “reckless,” or “dumb,” maybe – could also end up being profitable.