Concord Camera LENS W
March 09, 2001 - 10:55am EST by
2001 2002
Price: 7.25 EPS 1
Shares Out. (in M): 27 P/E
Market Cap (in $M): 0 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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Market Cap: $210 million (29 million shares)
FYE 6/30
Book Value - $6/share
Sales ; $173 MM FY 2000A; $196 MM FY 2001E; $300+ MM ; FY 2002E (see below)
Diluted EPS - $.64-- FY 2000A (excludes 1x tax reversal); $.50-- FY 2001E; $1+ -- FY 2002E (see below)
Insiders Ownership - 10+% with substantial options

Based on fundamental earning power, a low cost contract manufacturing operation, more than $3.50/share of cash net of debt, and an innovative line of digital cameras about to hit the market, Concord is both a value and a growth play. The Company is the 4th largest manufacturer of disposable cameras in the world behind Kodak, Fuji and Konica, a $1.8+ billion worldwide business that is growing 13 - 15% a year. Concord also makes millions of traditional film based APS and 35mm cameras at its 6000 worker, ISO 9002 certified, Chinese factory. Polaroid, Kodak, and Agfa collectively represented almost 60% of FY2000 revenue, but that dependence will reduce as new digital products are introduced. Concord also sells directly to large retailers such as Eckerd and Wal*Mart.

The Company has significant optics and design capabilities and a unique technology that will be apparent in a new line of digital cameras to be rolled out in the next 3 months under its own EyeQ brand name. Other digital products in the works include a picture taking attachment to a PDA (to be introduced shortly) and wireless security cameras. Exclusive of the Company’s own new products, Concord should land substantial additional contract business as companies such as Kodak are forced to reduce manufacturing costs. There is an unconfirmed story that EK wants to increase the percentage of outsourced production to 80% by the end of this year, from 20% at present.

The Company’s return on capital was more than 25% during fiscal year 2000 but has dropped precipitously this year due to margin pressures and reduced sales (see below). R&D of roughly $6 million/year is expensed as incurred. Concord’s capital expenditures have been modest and are likely to remain so since the Chinese factory can be easily and inexpensively expanded as more capacity is required. Because most sales are through the Hong Kong subsidiary, the Company’s tax rate is 10 - 15%. (Concord is a US company with management based in Florida.)

The stock price has collapsed in the last few months as Concord has been hit with reduced retail demand, a slower than anticipated roll out of its digital cameras, and most recently, a failure to consummate orders for 2 new digital products in the Far East. As a result, the Company will try to sell those products directly to retailers in Asia, using its own existing distribution system. While this is not as good a solution as having an indigenous partner, substantial revenue may be recorded in the next few months that is not included in its current projections.

For the first half year through December, the Company was on track to reach the Raymond James earnings estimate of 94 cents/share for the full year. However, the most recent Company forecast for the second six-month period through June reflects a dramatic drop in sales and earnings. Concord claims that they have lost no major customers and that the shortfall is due to retailer inventory pipeline issues. It also appears that certain traditional cameras have reached the end of their life cycle and that management anticipated replacing such business with digital sales. When EyeQ technical issues were more complex than anticipated (since resolved) and introduction of the line was delayed, there was no backstop of traditional business to fill the sales void. The loss of the potential Asian contracts compounded the bad news and moved the stock down from $12/share to $6.50/share.

In addition to getting caught in the overall market flight from tech stocks, Concord’s price collapse has been exacerbated by an overhang from a September 2000 secondary offering at $23/share. 4.5 million shares were issued in anticipation of one or more acquisitions that would improve distribution, manufacturing and/or technology, but no transactions have been finalized. Management is conservative and will not spend the excess cash unless it gets substantial value for the money. A $10 million share repurchase program was recently instituted - the amount is too small and doesn’t convey any conviction by the insiders -- but, present stock purchases reduce EPS due to lost interest income. Management does have potential acquisitions in mind and add-on transactions at reasonable multiples are likely.

The primary upside value of the stock is in the Company’s line of digital cameras, which appear to have a significant competitive advantage. The core of the technology was co-developed with Hewlett Packard and is now owned by Concord. It is expected that 20 million digital cameras will be sold worldwide in 2002, surpassing film based cameras for the first time (excluding disposables), with volume more than doubling by 2004. Concord has demonstrated 4 new cameras that are lightweight (e.g. 4 ounces, 1” thick), and avoid an external LCD display by examining the captured image through the viewfinder. The technology results in a dramatically extended battery life (up to 10x longer), avoidance of glare in reviewing the picture, and excellent picture quality despite relatively small image size. The precursor of the generation now being introduced is the KB Gear (private US company) $99 JamCam, which does not have the ability to review and discard exposed pictures. The JamCam, made and developed by Concord, has sold very well but is geared as an entry level, recreational camera.

Production of Concord’s top of the line EyeQ 3x zoom digital camera began last month and will initially be sold through a number of major European retailers before being available in the U.S. late this spring. The retail price will be below $200 - substantially less than comparable cameras. While these cameras are only VGA resolution, they combine proprietary firmware with a low power CMOS chip to create an excellent picture. One of the new models is co-branded with Nokia and allows 64K images to be transmitted wirelessly to Nokia’s recently introduced 9210 cell phone. The next generation will use Blue Tooth instead of the present infrared system for the same purpose. The VGA resolution of the EyeQ line means that Concord has initially targeted the non-print market (e.g. internet and wireless), although the print quality should be excellent for most casual users. The technology allows for megapixel output, and LENS will probably come out with a megapixel line in another year to compete with the high cost, high quality digital cameras that compete with photo processors.

Earnings are difficult to forecast at this juncture because of the retail slowdown and because high sales volume is crucial to absorbing overhead. Assuming a more normal retail climate and/or additional contract business at reasonable margins, plus good acceptance of the digital products, EPS estimates for FY2002 should begin at $1/share. If Concord does indeed have a competitive advantage with its digital technology, sales and earnings will escalate quickly. Digital cameras have lower margins than disposables and traditional hard body cameras, but since they will sell at substantially higher retail prices, digital products have the potential to rapidly leverage the top and bottom line. Digitals are easier to assemble because they have fewer parts, so greater numbers can be manufactured in less time than the existing non-digital products.


Return to significant profitability as a result of making up for the lost Asian sales, a rebound in retail orders, preliminary EyeQ sales figures and reorder interest, stock buy-back, new contract business, meaningful acquisition, and/or announcement of relationships with other major companies (e.g. PDA attachment). In the meantime, the $4/share of cash (vs 62 cents/share of total debt), $6/share book value and share buyback, have put a floor on the stock price.
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