Vicon Industries, Inc (VII), a strong competitor in the video security market, shows no signs of being hurt by the current economic malaise as it just posted the highest sales quarter in the company’s 41 year history. Bookings for the just completed fourth quarter were strong and margins improved. The company posted EPS of $.59 for the fiscal year ended September 30, 2008. The company has a bullet-proof balance sheet with $2.10 per share in cash and $5.50 per share in net current assets. What is there not to like about this $6 stock selling at 7 times earnings (adjusted for cash position), slightly above liquidation value and below book?
The Company is in the video security market, a market which appears resistant to the current slowdown. Vicon designs and manufactures a wide range of video systems and system components used for security, surveillance, safety and control purposes. A video system is typically a private network that can transmit and receive video, audio and data signals. The Company's primary business focus is the design of digital video systems that it produces and sells worldwide, primarily to installing dealers, system integrators, government entities and distributors. The Company’s product line consists of various elements of a video system, including network video encoders, decoders, servers and related video management software, analog and IP fixed position cameras, digital video and network video recorders, display units (monitors), matrix video switchers, robotic camera dome systems and system controls. Foreign sales made up 48% of sales in fiscal 2008. The Company’s principal foreign markets are the U.K., Europe, the Middle East and the Pacific Rim, which together accounted for approximately 89% of international sales in fiscal 2008.
The just completed fourth quarter and the 2008 fiscal year were excellent in spite of the current economic environment. Sales in the fourth quarter came in at almost $20 million, the highest in the company’s history. U.S. sales grew at 15% and foreign sales grew at 18% versus last year’s comparable quarter. More importantly, order intake was strong in both the third and fourth quarters at $17.3 million and $17.8 million, respectively. Gross margins for the quarter and year came in at 47.4% and 45.5%, respectively, versus 45.6% and 42.5% last year. The driver of Company sales and profitability has been and will continue to be new product development. The Company plans an aggressive development schedule for 2009. The Company operates in a competitive marketplace, but it has continued to be highly successful in the past few years as it has introduced new products and effectively managed the conversion from analog to digital systems.
The balance sheet could not be better. The company has $2.10 in cash and no debt. Net current assets are about $5.50 per share and tangible book is about $6.90 per share. The shares thus trade slightly above liquidation value and below book. The Company, acknowledging the undervaluation of it shares, recently expanded its buy-back program by $1 million.
What is Vicon worth? With excellent performance and prospects for growth in a rapidly growing security market the Company’s shares should command a premium, but let’s be conservative in our approach. If we were to price the shares at 12 times current earnings of about $.60 per share and then add $2 for the Company’s cash position the shares would be valued at about $9.20 per share. This conservative value gives the company no premium for growth but still represents a 50% premium to the Company’s current share price.
Vicon has the attributes of the kind of situation we love: 1) a simple comprehensible business; 2) a conservative balance sheet; 3) demonstrated effective management; 4) clear undervaluation; 5) excellent relative performance. We have been shareholders of the Company for many years and have watched management effectively transition the company’s product line from a traditional undistinguished analog line to a state-of-the-art digital line, introduce leading edge new products and conservatively mange the balance sheet. No one can be sure if the current slow down will not ultimately have an impact on the Company, but we believe at the current valuation the shares merit consideration.
1) Share buy-back program 2) Market recovery 3) Management buy-out