Another Look At Cybex

| About: Cybex International, (CYBI)

Followers of Cybex (NASDAQ:CYBI) are wondering how the recent NY State appeals court decision - a mixed bag - weighs on Cybex's ability to stay in business; and its value, if any. In short, the appeals court upheld a jury decision in a landmark personal injury case, but reduced the award.

By my analysis, Cybex will stay in business, and is worth about $3/share (with a floor of about $2), the current market reaction notwithstanding.

See my earlier article on Cybex and the jury decision (Barnhard v Cybex) that threatened to shut them down.

Mercifully, Cybex's 500 employees will likely not be thrown out of work, despite the bone-headed NY jury that decided in 2010 that Cybex is liable for the injuries of a woman who pulled a leg press machine over on herself.

If one of the jurors or judges is reading this: you are the reason that America is in decline. If a company can be held responsible for injuries sustained by someone's decided misuse of its perfectly good equipment - in this case, forcefully pulling the machine over on themselves - then every refrigerator or other large product is a potential liability. Maytag, beware.

But I digress.

Cybex's reduced liability is around $33M, after insurance; a large figure, but manageable for a company with $130M in annual revenue.

The easiest way to arrive at my valuation is using the company's own accounting in its most recent 10-Q form. Cybex's assets, including liabilities from the original ruling, amount to about -$15M. The appeals court decision reduces the award by about $20M, which benefits Cybex by roughly +$15M, since it is responsible for 75% of the award. On balance, the company's total equity, given the appeals court decision, is now roughly zero.

So Cybex is a company with (conceptually) zero equity, $130M in revenue, good prospects for profitability, and some forward obligations in the form of interest payments. (Usually you have to back out a company's cash and other equity to obtain a meaningful P/E; zero equity actually makes things easier).

Even with no further reduction (on further appeal, or settlement with the plaintiff), Cybex can fund the award by issuing a bond, and continue with its successful business.

Cybex was earning about $10M/year before the recession, which if resumed would give it a value of maybe $4/share. Coming out of the recession, with a new factory, a great new product lineup, and rising revenue, it can likely earn $15M, $20M, or more.

But we need to also consider Cybex's sizable debt, which will now presumably be around $60M. We've already accounted for the principle of that debt against its equity. Interest payments on the debt should be no more than $6M/year (or $4M/year after the tax deduction). That's assuming a sky-high 10% interest rate, which is really on the pessimistic side. The debt load is bad, but not fatal.

So, given a modest estimate of Cybex's earnings in a recovery, and accounting for all its recent bad news, I come up with a value of around $3/share, with a floor of about $2/share. A more optimistic estimate, extrapolated from its rapidly rising revenue, gives a value double that.

(On my way to Rochester to observe the appeal last month, I stayed at my favorite hotel, the Dream downtown in NYC, which recently stocked its fitness center entirely with new Cybex equipment. Out of curiosity, I tried to tip one of the machines over, and couldn't do it. So Cybex has apparently improved its designs, and may be less exposed to this sort of frivolous lawsuit going forward.)

Disclosure: I am long CYBI.

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