In an amended 13D filing on Electro Scientific Industries Inc. (NASDAQ:ESIO), Nierenberg Investment Management disclosed a 10.8% stake (3.16 million shares) in the company. This up from the 9.5% (2.76 million shares) the firm disclosed in a past filing.
The firm noted they recently acquired 400,000 more shares of ESIO, after what they said was a market over-reaction to the short term, fixable declines in ESIO's gross margin and backlog.
The firm said the combination of organic growth, increased R&D investment, a number of promising new product releases, and possible acquisitions could enable ESIO to double its revenues over the next three to four years which could drive EPS to $2.00 and the stock price to $40, more than double is current price.
In a past 13D filing, the firm disclosed a letter sent to the Chairman of the Board of ESIO proposing a special one-time cash dividend of $4.00 per share.
From the 'Purpose of Transaction' section of the filing:
We recently acquired 400,000 more shares of ESIO, after the financial community over-reacted, in our view, to the short term, fixable declines in ESIO's gross margin and backlog. The stock market's myopic obsession with short term and outof context fragments of information causes it to undervalue, or even ignore, good companies which have the potential to multiply their share prices over several years, if the market sees the shares as "dead money" over the next oneor two quarters. Therefore, we now own over 10.83% of ESIO and believe that weare ESIO's second largest shareholder.
In our most recent prior Form 13D/A, we asked ESIO's Board of Directors to cure the company's excessive capitalization, and its resulting low return on equity,by paying the shareholders a special dividend of $4.00 per share. Because we believe that the Board will be meeting soon to deliberate about our request, it is neither appropriate nor necessary to comment further at this time.
The only thing we will do is update our prior discussion about cash and marketable securities per share from ESIO's latest Form 10-Q, for the fiscal quarter ended December 2, 2006. On its face, the 10-Q appears to show that ESIO's cash and marketable securities per share rose sequentially from $7.33 pershare to $7.46 per share on December 2, even after investing $5 million cash ina private company. A close reading of the 10-Q, however, shows that ESIO has anadditional $8 million of cash, not included in the cash and marketable securities lines of the balance sheet, $1 million from a subsequent insurance settlement and $7 million in a litigation bond in Taiwan, which increases cash per share to $7.73. Finally, as management volunteered in their January 4quarterly earnings conference call, the amount of ESIO's cash invested ininventory currently exceeds their MBO's and will be reduced.
Similarly, receivables are $5.6 million higher than at the beginning of ESIO's fiscal year.If ESIO were to restore inventories and receivables to June 3, 2006 levels (we believe both ultimately can be reduced even more), and if we were to add the above-mentioned $8 million cash, ESIO's total cash and marketable securitieswould be $8.21 per share, 43.2% of ESIO's share price at the close on January 9.ESIO is profitable, cash flow positive, and it has zero debt. The company generated $9.9 million of net cash from operating activities in the quarterended December 2, or 34 cents per share.
In conclusion, we reiterate why we bought 400,000 more ESIO shares on January 4and 5, 2007:
1. We believe that ESIO has excellent management.
2. ESIO enjoys world leading market shares in its three major product lines, which give it the potential to earn an attractive return on equity.
3. The combination of organic growth, increased R&D investment, a number of promising new product releases, and possible acquisitions could enable ESIO to double its revenues over the next three to four years. Management has shared this goal with the public on several occasions. Given the company's business model, such growth would drive earnings per share north of $2.00, and, in our view, ESIO's share price to $40, more than double its current depressed level.
4. ESIO continues to have a fortress balance sheet, fed by free operating cash flow from profitable operations.