Two months ago, laser-maker Rofin-Sinar Technologies (RSTI) nailed Wall Street estimates when it reported fiscal Q3 2015 earnings of $0.41. That was the precise number that analysts had told investors to expect... but it still totally failed to impress one investor in particular.
On Oct. 8, private investment firm SilverArrow Capital Advisors LLP published an "open letter to stockholders of Rofin-Sinar" announcing plans to nominate new directors to the company's board. In explanation for its desire to install new management, SilverArrow noted that it has acquired 9% of Rofin's outstanding shares over the past year or so, and intends to hold these shares for the "long-term." But first, SilverArrow has a few bones to pick with Rofin's management.
Silver Arrow's shot across the bow
Generally speaking, SilverArrow believes that "the Company's current board of directors ... and management team have not made the proper strategic and operational decisions to unlock value for all stockholders." More specifically, SilverArrow alleges that certain Rofin board members have "engaged in related party transactions" and "operate in their own interests (and not those of the stockholders as a whole)."
SilverArrow also says that Rofin "has lost relative market share" and "missed out on growth opportunities," growing its sales only 5.8% annually over the 2010 to 2014 period, while the rest of the "global laser market" compounded growth at better than 17%. SilverArrow argues in particular that Rofin has mistakenly focused on European sales and deemphasized the larger Asian laser market.
Underlying many of these complaints, says SilverArrow, is the fact that Rofin-Sinar "is burdened with numerous corporate inefficiencies" (implying a need to restructure and lay off workers to cut costs). One worker in particular whose job is in peril is the CEO himself. According to SilverArrow, CEO Thomas Merk is directly responsible for "numerous failings [that] are operational in nature."
As a result, SilverArrow argues that current management is responsible for Rofin stock having "significantly underperformed [other stocks] over the past one, three and five-year periods."
Rofin's response
To this litany of complaints, Rofin-Sinar issued a terse rebuttal on Oct. 9, pointing out that whatever its past mistakes, in its most recent quarter the company "doubled year-to-date net income, increased our gross margin to nearly 40% and showed strong sequential sales growth in fiber and ultra-short pulse lasers." Declining to address SilverArrow's specific allegations (at least not publicly), Rofin's board said it intends to continue with its "existing growth strategy."
So who's right in this corporate episode of Rofin said, SilverArrow said?
The fact that Rofin-Sinar stock has been a poor performer over the past five years or so is really not in dispute. You can see the picture painted plainly in the chart above. On the other hand, SilverArrow is pretty clearly mistaken in labeling the stock an underperformer over the past year. To the contrary, Rofin-Sinar stock is up more than 33% over the past year, against less than an 8% gain for the S&P 500.
Granted, about half those gains came only since the last quarter's report -- the one Rofin management highlighted in defense of its decision to stick to its existing strategy. But it's hard to see why SilverArrow is criticizing Rofin-Sinar for its past poor performance now. That poor performance drove Rofin-Sinar stock into the gutter, which in turn attracted SilverArrow's interest. But since those dark days, data from S&P Capital IQ confirms that Rofin-Sinar has made real progress in stabilizing its revenues, expanding its gross and operating margins, and delivering more net profits to the bottom line. Year-to-date, Rofin-Sinar's net income is up 85% in comparison to H1 2014 levels.
What's more, as my Foolish colleague Dan Caplinger pointed out back in August, Q3 saw a "surprising ... bounce-back in Asian sales, which reversed a decline in the previous quarter to rise by 11%." So that SilverArrow accusation, too, seems to fall short of the mark.
Valuation
Perhaps one thing that we can all agree on -- Rofin-Sinar, SilverArrow, and other investors besides -- is that Rofin-Sinar stock today offers a compelling bargain. Priced at just 20 times earnings, and even cheaper when valued on free cash flow, Rofin-Sinar stock is priced very cheaply if the company succeeds in hitting analysts' consensus forecast of 30% long-term earnings growth.
If SilverArrow's newly proffered directors can boost that growth rate even further -- well and good. Investors should just hope that an internal power play for control of Rofin's board doesn't upset the boat and spoil a good valuation on the stock for everyone who owns it.
