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Iomega Q3 Earnings

Iomega Reports Record 3rd Quarter as Earnings Rise 135% and Revenue Increases 39%:
Now, Valuing the Stock

by Jeff Fischer (TMF Jeff)

ALEXANDRIA, VA (Oct. 16, 1997)/FOOLWIRE/ -- After the market tanked today, IOMEGA (NYSE: IOM) announced record quarterly earnings of $30 million, or $0.22 per share -- beating estimates by 10%. Revenues for the third quarter climbed 39% to a record $432 million, eclipsing the record of $400 million set last quarter. Sales grew 8% sequentially after growing 11% sequentially last quarter.

Gross margin increased 3.5 basis points after increasing three points last quarter. Gross margin for this quarter was 32.5% -- rising from year-ago gross margins of 26%. Net margins increased to 7% from 6.5% last quarter, and from only 4% last year.

After achieving positive cash flow of $57 million last quarter, cash flow was a positive $33 million this quarter. Cash and equivalents increased over 20% to $166 million, while total debt decreased $2 million to $56 million.

The company's shipment of Zip drives increased 26% over the last quarter, while Zips going into the OEM channel accounted for over 35% of all Zips sold, compared to 30% last quarter. The company faced some supply constraint hassles, but was able to increase production adequately during the second half of the third quarter, though inventory is still below the company's goal.

Iomega now has trailing sales of $1.59 billion. With 137 million shares outstanding, the company has a market capitalization (at $24.75 per share) of $3.39 billion -- meaning the stock trades at 2.1 times sales. It's debatable to what degree that you can call Iomega a "consumer business," but a majority of sales are directly to consumers, and sales through OEMs end up in consumers' hands as well. Most leading consumer stocks with margins of 7% and higher, market-beating earnings growth, and a strong brand name currently trade at 3 to 4 times sales.

This isn't to imply that Iomega deserves that type of sales multiple, but it does help the argument against bears who claim that the stock is overpriced. At two times profitable sales, with 22% and rising operating margins, a projected five-year growth rate of 15%, market leadership, and a strong cash position, the stock's valuation is leaning to the reasonable side of the tracks when measured by the price-to-sales ratio.

With $0.73 in trailing earnings per share, Iomega trades at 33.9 times earnings. Eighty-six cents per share is expected in total earnings for fiscal 1997, which ends in December, while $1.16 per share is expected in fiscal 1998, a 35% increase over 1997. The stock trades at 21 times the 1998 earnings estimate. The current PEG ratio on Iomega is 0.76, implying that the stock is undervalued by 31%. The PEG values the stock at over $32 per share. Meanwhile, the YPEG -- which multiples the long-term projected growth rate by the far earnings estimate -- gives a fair price of only $17.25 (15% projected growth rate multiplied by $1.16 EPS). Iomega bulls may scream that 15% is too low a projected growth rate for the next five years, and they may have good reason to think so. Earnings should increase 83% this year, and yet they are estimated to grow only 35% next year, and then (obviously) substantially slow over the following years.

Because Iomega has OEM deals with all of the major PC manufacturers and also sells its products to millions of folks who bought computers in the past, Iomega should hope to grow at least at the rate of the PC industry. Analysts and leading PC manufacturers anticipate industry growth of 17% to 20% per year. If Iomega can maintain its market leadership and grow at least as quickly as the computer box industry, the long-term projected growth rate given the company is probably somewhat conservative.

The YPEG value of $17.25 per share would give the company a market cap of $2.3 billion, or 1.4 times sales. A company in Iomega's position, growing as it is and with net margins reaching a respectable 7% -- while hopefully headed even higher -- usually deserves a higher sales multiple than 1.4. The fair value of the stock, to this writer, seems to be much closer to the PEG value of $32 than to the YPEG value of $17.

The results from the two valuation numbers show pointedly, though, that there are many ways to skin a dog, and that no single valuation method should determine your opinion on a stock. There are literally dozens of factors to consider in valuing businesses, and the PEG and YPEG are simple shots in the dark that sometimes rebound with value, but often fly off into the night, discounted and minimized in significance. More important than such numbers in this case is the price-to-sales ratio in relation to revenue growth, the increasing margins, the company's industry position, and the probable growth going forward. Sprinkle in the omnipresent technology risks, but also consider Iomega's growing brand name, growing customer base, coming technology... you get the point. The stock's intrinsic value, with business this strong, arguably lands much closer to the PEG value than the YPEG value.

[Iomega Message Board]


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