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Business Description

Perceptron (NASDAQ:PRCP) makes automated systems which historically have been used for automobile assembly. The core competency is in measurement for process control. Newer products enhance enabling robots to automate flexible vehicle assembly. Other products measure gap and flush in the finished good to see if the fit and finish is within acceptable limits.

PRCP has a second segment which utilizes their measurement expertise on products outside the auto industry. PRCP provides to third party OEM manufacturers technology which digitizes, reverse engineers and inspects. This has been the growth engine for the company. In 2007, they made a significant move into the professional tradesman market and hit a home run with the product for plumbers, electricians and HVAC installers called a SeeSnake.

Financial Position and Valuation

PRCP has no debt, 22m in cash (or $2.30) in cash and produced 16% revenue growth in FY 2008. Management has not issued formal guidance for FY 2009 except to say that operating income and margin will improve from FY 2008. FY for PRCP ends on June 30. In FY 2008, the company had $72m in revenues and $2m in operating income.

I have assumed only 5% growth in the automobile business and break even. In the technology business, based on the new products and success of Seesnake, the technology segment should grow at least 15% in FY 2009. Total revenues in FY2009 should be around 80m and operating margin should reach 7%. My model has PRCP doing $7m in free cash flow or 75c. Depreciation and Amortization amounts to $1.5m.

Automobile Business - Opportunity as Detroit Retools

PRCP has seen declining revenues in the Automated Systems business. In 2006, revenues from this segment were 47m, declining in 2007 to 42.3m and again declining in 2008 to 39.1m. PRCP has historically been tied primarily to Detroit. In 2008, Asian sales amount to just 5m. 60% of the sales are in the US and the rest in Europe. The company has had little success selling in Japan, but is selling modestly in China. On a cashflow basis, the automobile business was cashflow break even at 39m in annual revenue.

The auto business is not exciting at all to investors. Investors fail to realize one critical driver - that the success of PRCP is not driven by the total number of cars, but rather by the number of model changeovers. A number of recent events make this segment much brighter:

  • Recent union contracts allow for a less experienced workforce requiring more automation and measurement.
  • The $25bn loan to carmakers is expressly for the purpose of allowing Detroit to modernize. All carmakers and suppliers with operations in the US are theoretically eligible.

However, the bill restricts benefits to plants that have been in operation for at least 20 years, thereby excluding most foreign carmakers. These are PRCP's main customers. The big 3 carmarkers have stated they want to go to flexible lines and small runs and avoid the problems of the past.

Technology Tools Business

The growth in the revenue has been driven totally by this segment. In 2006, this segment did 10.9m, growing to 20m in 2007 and 33.4m in 2008. The success of the SeeSnake, which was sold through Ridge, has been remarkable given that it cost less than $1.5m to design. In the March 2008 quarter, SeeSnake sold 17m. SeeSnake might not sound like much, but it enables tradesmen and inspectors to detect and diagnose the unreachable. It has a camera on the end of a flexible rod which shows on a hand-held screen and can be saved and uploaded. It enables the tradesman or inspector to see inside walls and check plumbing for damage and blockages. There are well over 2m tradesmen who would need this tool.

In May 2008, PRCP began shipping a second product labeled through Snap-On which is a visual inspection device for mechanics. The imager head can fit into spark plug holes, inspect panel cavities, under the dash work, suspension and transmission work. Potential market is 2.1m mechanics. Product sells for $400 and PRCP would get $175 per unit.

Risks

  • No valuation ascribed by potential acquirer or investors to the automobile business.
  • Short window for the inspection products before a flood of copycat products come from China.
  • Company uses the cash for acquisitions.

Valuation

Price: $4.12
Shares O/S: 9.1m
Mkt Cap: 37m
Cash: 22m
Enterprise Value: 15m

Sales 2008: 72m
Sales 2009: 80m
EV/Sales: .2x

Disclosure: Author holds a long position in PRCP

Source: The Long Case for Perceptron