A Better Tax Call, Eight IT Stock Picks, New
Regs Coming, Canadian dollar will keep falling, Capital Pool Corps
Update, and Local Events
In case you were wondering why you haven't
heard from me since January 25th, the reason is that I'm changing from a
bi-weekly routine to a monthly format. Hence, I'll be reporting to you on the
first Friday of each month. I love doing these columns but unfortunately they
consume a big slice of time. I may contribute the occasional "special"
report if anything newsy occurs.
A
Better Tax Call
I
hate saying I told you so. CEOs of tech companies, especially the larger ones,
got their income tax-cut wishes fulfilled when the BC Liberals
took office last year. It seemed to be the
single most important "must-have" as the panacea to cure the brain
drain to get and keep top talent working in our high tech companies. I
believe that Gordon Campbell would still have delivered on his promises
to tech execs by announcing the cuts but phasing them in a little more gradually
along with some other tax deals on the investment side.
No
one thought we'd see the sudden drop in the tech sector growth curve. In
2000, companies couldn't recruit enough talent. Many of those that they did
manage to attract are now suddenly out on the street. Those income tax cuts
designed to lure difficult-to-hire Americans are having no impact on the
economy. And, there's still no incentive on the investment side which is what we
really need to grow our companies. I've been whining for years about the need to
have up-front versus cashing-out incentives for investors, e.g. angels, to put
their money into private ventures with a five to ten year commitment. That
investment and its ripple-effect is what's needed.
It's
my understanding that there are some initiatives percolating in this regard
(e.g. new labor funds, upgrades to the Venture Capital Corp program and of
course, the revisions to our crazy securities regulations - more on this below)
but we still need to focus on getting individual investors into the game (ie
private company investments). And, I don't mean public company investments.
Other than IPO offerings or private placements, getting people to invest in the
market does nothing for the companies. It only creates liquidity for, and
trading among, investors. We need a better balance between tax relief on the
income side and tax stimulation on the investment front. Right now, we're a
little out of whack.
Eight Infotech Picks
I'm often asked this question: "What's a
good B.C. tech stock to buy?" That's a difficult question to answer without
knowing what one means by "good". With respect to making a gain (long
term or fast buck), it depends on one's risk propensity. A speculative stock
holds the promise of a higher gain but at a much higher risk.
In the info-tech sector, I'd like to highlight
eight senior exchange (TSE, NASDAQ) listed companies. These range from what I
believe are the safest to the most speculative. I define the safest as those
with the best earnings track record, the lowest risk of a decline from current
price levels with good medium to long-term upside. The more speculative are the
unproven ones which, if (and it's a big "if") they hit their targets
(development and sale-wise) will produce a multiple return (i.e. several hundred
percent).At
current price levels, there may be some good bargains here.
In
order, from safest to most speculative, my picks are MacDonald Dettwiler
(TSE:MDA), Creo Products Inc. (NASDAQ:CREO), PMC-Sierra Inc (NASDAQ:PMCS),
A.L.I. Technologies (TSE:ALT), Sierra Wireless Inc. (TSE:SW), , Pivotal
Corp (NASDAQ:PVTL),ACD
Systems (TSE:ASA),
Infowave Wireless (TSE:IW).
MacDonald
Dettwiler
(TSE:MDA), is a pioneer on the B.C. tech scene. It was one of the very first
high tech companies established back in the early seventies. The company, unlike
most in the sector, has reported 69 consecutive quarters of profit! The company
ranks 4th on the BC technology venture revenue scale. The company may benefit
from the increased government spending on security and defence. It’s best
known for its Canadarm deployed on NASA's Space Shuttle. Most analysts
are expecting healthy near-term stock gains. Since MDA went public in mid-2000
at C$14, its stock is one of the few with a substantial increase, i.e. close to
100%. In the latest quarter (Sep30), sales rose 12% to C$124 million while
profit increased to C$4.9 million. Even better is the balance sheet which,
during the quarter, added C$13 million in cash flow. This company is truly
one of the tech industry’s treasures with its solid technology and good
management team. In 2001, it was named “Company of the Year” by the B.C.
Technology Industries Association. Trading at $26, it's near the high end of its
52-week range of $18.50 - $28.50. I ranked it first mainly because of its
performance record which I believe will continue.
Creo
Products Inc (NASDAQ:CREO)
is one of two B.C. technology companies to hit $1 billion (Cdn) in sales. For
the fiscal year ending Sept. 30, 2001 Creo achieved revenues of
US$656.5-million, an increase of 45 per cent on the US$453.3-million reported a
year ago. This increase was primarily a result of the company's April, 2000,
acquisition of the prepress division of Scitex Corporation Ltd. Adjusted
earnings for Creo were US$27.1-million or 54 cents per share (diluted) for the
fiscal year ending Sept. 30, 2001, compared with adjusted earnings of
US$41.9-million or 97 cents per share (diluted) for the same period a year ago.
Adjusted results exclude the effects of costs associated with the acquisition -
something that always results in certain writedowns of good will and other
intangibles. However, as I see it, this acquisition positions Creo for market
dominance. In addition to the reduced earnings, some pressure on the stock
price is due to Scitex Corporation's announcement that it intends to sell 7
million shares of Creo Products Inc. to hold 6.25 million. As demand in the
printing sector, currently depressed by weakness in the advertising market (Creo's
4th quarter revenue slipped to US$143.2-million from US$173.3-million a year
earlier), picks up again next year, Creo should perform well for its investors
in the long run. However, during this weak period, the company was busy
developing products for new markets. For example, the first one, targeting the
creative side of graphic arts was launched at MacWorld in January. Trading in
the US$10 range – well below its mid-99 IPO price of US$15, I believe that it
stands a good chance of getting back to its 52-week high of US$21.25 in the next
one to two years as selling pressure abates and demand rises in the printing
industry.
PMC-Sierra
Inc
(NASDAQ:PMCS) is a communications “fabless” chip maker supplying the leading
telecoms such as Cisco, Lucent and Nortel with the building
blocks that go into their high-speed transmission and networking systems. It is
the other B.C. firm that's achieved C$1 billion in sales. However, due to the
slow-down in this sector, PMC’s annual revenue for 2001 dropped 54% to US$322
million causing it to record a loss of $639 million vs a net income of $75
million a year earlier. The 52-week trading range on the stock is $9.37 -
$50.12. A the 2000 peak, it was over $200.
Officially, PMC is a Delaware corporation with head office in Santa
Clara, California. But practically speaking, it is really a B.C. company because
that’s what is left of the merger of two firms. Sierra Semiconductor was
formed in 1984 in Silicon Valley as a modem chipset business. PMC-Sierra was
established in 1992 in B.C. as a spin-off from MPR Teltech, the R&D
organization formed by what was then B.C. Tel (now Telus). PMC-Sierra
was acquired by Sierra Semiconductor in 1994 and in 1996 the board took the bold
move of abandoning the low-margin modem business to concentrate on more
lucrative, higher-margin networking products. Sierra Semiconductor
changed its name to PMC-Sierra in 1997 to recognize this new thrust. The key
executives and development team work still work out of the company’s Burnaby,
B.C. offices where overhead costs and personnel costs are far lower that in
California. Last year, the company developed 36 new products. This, coupled with
a recovery in the communications sector and the company’s realization of its
cost trimming initiatives, should see the company return to profitability this
year. And when the telecoms sector picks up again (it will, we're just not sure
when), it could once again be hot.
A.L.I.
Technologies (TSE:ALT),
a medical imaging firm, has aroused positive sentiment following a strong
earnings release. Recently, its shares rallied up to the C$34 level following
news of a successful quarter. Net income for the latest quarter is up from a
loss of C$690,000 to a gain of C$3.6 million. The company posted a huge increase
in revenue for the quarter. A main advantage to the company is that most of its
revenue is generated in US dollars and costs are in cheap Canadian dollars. The
company expects revenues of C$70 million and EPS of C$1.40 for 2002. RBC
Capital Markets has designated it a "top
pick" with a 1-year target price of C$38.00. Research Capital has
raised its target from C$30.00 to C$40.00 and Taurus Capital Markets
reiterates its "buy" rating, increasing its target from C$28.00 to
C$34.00. Only a year ago,
the company was trading at its 52-week low of C$4.00.
(I delight in knowing that I had recommended it in this column long before then,
even.) The company attributes the better-than-expected results to
operating efficiencies, cost control and a favorable foreign exchange impact.
ALI reaffirmed its forecast of more than C$70-million in revenue for fiscal
2002, but increased its guidance for share profit to "at least" C$1.40
a share from more than C$1. (The forecast assumes that the U.S./Canadian dollar
exchange rates will remain constant over the balance of the year.) ALI has
created a reputation for itself within the medical imaging industry due to its
strong management team and its ability to carry out the business plan. Investors
may be buying in at the high end, but this company still has lots of room on the
upside. Many investors still see it as an emerging company.
Sierra
Wireless Inc.’s
(TSE:SW) mission is to be the world leader in wireless data modems and software.
Incorporated in 1993, it was named Canada’s fastest growing technology company
in 1999 by Deloitte & Touche. Annual sales are reported at US$60m for
2001, an 11% increase during a year when many others experienced a decline. The
company’s commitment to R&D, i.e. $19 million in 2001, will help the
company in maintaining a leadership position in this industry niche. During its
last quarter, the company demonstrated its AirCard wireless modem product
line working with the new Microsoft Windows-powered Pocket PC 2002
software at the Pocket PC 2002 launch event. As a Microsoft Pocket PC 2002
launch partner, Sierra has worked strategically with Microsoft to deliver a
wireless personal digital assistant (PDA) that gives business users the freedom
to connect to the Internet any time, anywhere. Development agreements with other
firms such as Casio and distribution agreements with companies like Ingram
Micro in North America and Hugh Symons Mobile Data for the European
market. These alliances will help Sierra garner both a technical and market
leadership position. The stock is trading around $17 - near the low end of its
52 week range of $12.50 to $50.60.
Pivotal
Corp
(NASDAQ:PVTL) a North Vancouver maker of CRM (Customer Relations Management)
software went public in August, 1999 at a price of US$12 per share. Pivotal
provides its scalable eBusiness CRM software
for Web, wireless, and hosted solutions. For the six months ended Dec 31,2001,
revenues fell 30% to US$32.5 million and the company’s net loss totaled
US$85.6 million, up substantially from $10.1 million reflecting a slowdown in
Europe and US$51.4 million in restructuring and other charges. Pivotal’s
52-week trading range is US$2.36 to US$25.70 and the stock is currently trading
just under US$5.00. Last year, company founder Norm Francis turned the CEO’s
seat over to Bo Manning. New
customer acquisitions including companies such as Microsoft, Olivetti
and Sapient are encouraging signs. A number of analysts following this
company have upgraded their recommendations. This is a very competitive area and
because product switches from one company to another are very costly and
disruptive, new customer wins are excellent proxies for a the companies future
success. I ranked it high in risk because it's in a very competitive space and
it has had trouble showing a profit. On the other hand, it may be an attractive
acquisition target at its current market cap of "only" US$115 million.
ACD
Systems (TSE:ASA),
a Victoria imaging software company is showing some excellent customer
acceptance. If your mind has ever been boggled by the myriad of image viewing
and editing software, ACD Systems with its “ASA” ticker may spell some
relief for you. Future Shop Ltd., Canada's leading retailer of consumer
electronics and digital photo processing (now a wholly owned subsidiary of Best
Buy Co. Inc.) has entered into an agreement with ACD Systems to bundle a
customized Future Photo version of its very popular ACDSee software package. A
testimonial to its popularity is the fact that more than one million copies of
the latest version of this software were downloaded by consumers in the month
following its release in late September, 2001. Revenues for the second quarter
(three months ended Sept. 30, 2001) were C$3.14 million as compared to C$2.36
million a year earlier. EBITDA for the period was a loss of $401,184. ACD
anticipates strong revenue growth and profitability through the second half of
the fiscal year, supported by the initial response to its new releases. Trading
at only C$2.10, well off its peak of $10 last year, this is another
“speculative-buy category” stock well worth taking a look at.
Infowave
Software
(TSE:IW) is my most speculative pick. I like because of its ambitious plans to
establish itself as a leading wireless technology provider. I heard CEO Thomas
Koll, ex-Microsoft, speak at the recent Softworld 2001 Conference
held in Vancouver. I was quite impressed by the company's plans, but more so by
the fact the Koll personally put at risk $5 million of his own money. That
spells commitment and confidence! Infowave closed a US$15 million private
placement just before Christmas. Revenue
for the nine months ended Sept. 30, 2001, was C$2,654,386 - 256% higher than the
C$745,013 reported in the first nine months of last year - still modest, but
moving in the right direction. Infowave was named one of the 50 fastest growing
companies in Canada by Deloitte & Touche, LLP.
I
want to focus somewhat on Infowave in light of what's been happening to its
stock in the past few months. It also serves as a good example of an
"extreme financing". I call it this because of the massive dilution
suffered by former investors and the fact that this is probably the company's
one and only shot at hitting breakeven or going bust. It's also extreme in that
for thrill-seeking investors it makes for a wild adrenalin rush ride. Who needs
the Olympics when you can watch this kind of action?
The US$15M private placement was sold by Commonwealth
($10M) in the U.S. and Canaccord in Canada in late November 2001 to
well-heeled investors committing a minimum of $97,000 in B.C. and a minimum of
$150,000 in Ontario (these are among those silly rules expected to be eliminated
soon - see below).
This private placement was in the form of
so-called "special warrants" which would, upon the acceptance of a
prospectus by various securities commissions, be converted into shares and
warrants. So, for $.69, an investor would get one share and the right to buy an
additional share (for every two special warrants bought) at $.90 - good for up
to three years (but potentially limited to $9.00 if the stock sky-rockets). The
only catch was that investors had to hold the stock for four months or until it
was "qualified" for re-sale under the prospectus.
For a company with some 23+ millions shares
outstanding, this means an immediate dilution of 34 millions shares plus another
17 million shares if and when the warrants get exercised. In addition from the
severe dilution, it also means a huge increase in the stock "float" -
creating a lot of supply of stock.
For buyers, this looked pretty good back in
November when the stock was moving towards $1.00 (it actually went as high as
$1.91 in early January). What a deal! Of course, all the buyers know that they
can't benefit from this run-up because of the hold period on their stock. The
gutsy ones decided to short sell stock to lock in the high price. The short
position in the stock rose to over 1.5 million shares. I'm sure many more would
have shorted but the fear of a so-called "buy-in" and the uncertainty
as to the duration of the hold period scared them off.
Last week, the company announced that the prospectus was receipted and that
the 23+ million shares would be tradable this week. This
news, plus the approaching likelihood of this event, has caused a steady
day-by-day drop in the stock price to the low 60 cent range where is is today.
According to Jim Rausch, Director of
investor relations at Infowave, most of the wireless companies saw substantial
drops from their 2002 highs to their current trading levels. But Infowave had
this additional hangover to contend with. A colleague commented, "I don't
know too many companies who have successfully issued 150% new shares and didn't
end up at (or below) the issue price. Usually a company can issue 10-20% in new
shares - the market can usually handle this amount of dilution."
It seems to me that if investors are only just
getting back their investment, or less (i.e. if they sell now), plus the
warrants which are only worth .03 (the 17+ million warrants also trade on the
TSE under the symbol IW.WT), then Infowave is pretty lucky to have been able to
pull this off. This is not rocket science. I've seen this scenario played out
many times before. It can only mean that the "sophisticated" investors
among the November purchasers are very confident in the prospects of the company
and are not among the current skittish sellers.
For the speculative
investors in the November group, it might just have been simpler to wait and buy
a bunch of cheap warrants!! Now, you too, can buy these warrants for a nickel. I
wonder how this game would have been played under the new pending securities
regulations?
What it's all going to come down to for Infowave and its
investors is the company's ability to score within the next year. The wireless
market is a very confusing space. There are many standards, many platforms, a
myriad of hardware devices, telecoms services and lots of hype around future
offerings. Infowave does have solutions today which allow its enterprise
customers (Infowave is targeting larger, Fortune 1000 style, accounts) to
connect people to their servers and applications using different devices.
They've got a lot of incentive - and cash - now to deploy their solutions before
others do. The only risk is going to be the competition. Just like in the
Olympics!
So of these eight picks, which one am I betting on the
most? The most speculative, of course - Infowave. But, I have to confess that
the door looks attractive now that the stock has dropped below the purchase
price. I could buy some warrants and risk a much smaller amount of capital.
Why the Canadian dollar will keep falling
An economics question. Regarding the value of
the Canadian dollar, I am challenging any of you economists out there - armchair
types or professionals to help me understand something.
The value of the dollar is based on the demand
for it (or the lack of demand by sellers of the Canadian dollar). So, let's
suppose we have a very prosperous economy. Won't foreign investors demand
Canadian dollars to invest in Canada (as they have been doing). If their
investments go up then they will at some time cash in these investments and in
turn sell Canadian dollars. So the better we (and they) do, the more likely
Canadian dollars will be sold. On the other hand, residents in Canada are
converting their Canadian dollars to U.S. bucks in order to still have a little
spending power left when they travel (or retire) south. It's unlikely that their
US gains will all be converted back to Canadian because as long as the loonie
keeps dropping, they may as well keep the US dollars and re-invest these in
Nasdaq stocks or real property (and then there are those Cayman and Bahamian
refuges, too!). So, what I can't figure out is where any demand for the
Canadian dollar will come from - no matter how well we do! The only thing that
might change this is a hot commodity product of which we're a net exporter
(fish, wood, diamonds) that suddenly appreciates in value causing more Canadian
dollars to be purchased by foreigners to buy these commodities, but even then,
there's a good chance that those who get the Canadian bucks will promptly buy
the American greenback to preserve their value. What am I missing?
New Regs Coming
I've mentioned before that I'm very encouraged
by the BC Securities Commission and its desire to simplify capital
raising for companies, especially the private ones. Many changes to current
regulations are expected in the next few months. I've discussed many of these in
previous columns.
Some changes are already taking place. For
example, reporting requirements on privco financings are becoming less onerous. The
Commission will no longer make public Offering Memorandums and Forms 45-902F
(formerly, Form 20s) filed by "private issuers" in BC (that are also
not reporting elsewhere). The OMs and Forms (including the list of purchasers)
will not be posted on its website and will not be included in the public file.
Members of the public, the media and competitors will not be able to access such
information other than by successfully making an application under the Freedom
of Information and Protection of Privacy Act. In this column, I have often
reported on investment activities in private companies. Unfortunately for the
nosy among us, this will no longer be possible but I think it will make life a
little simpler for private companies. After all, why shouldn't they be allowed
some privacy?
The BCSC has indicated that it proposes
significant reforms to securities regulation
in BC, including new securities issuance procedures and registration
requirements for participants.
Here are some links
to several documents that explain the BCSC's plans in detail:
BCSC news release: http://www.bcsc.bc.ca/news/NR02_17.asp
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