Pat McKeough recently replied to a member of his Inner Circlelooking for his take on this provider of video and audio systems. The company’s niche market and leading position enhance its appeal, but that could also challenge its future growth, says Pat.
Q: Hi Pat: May I have your opinion on Evertz Technologies (ET)? Thanks.
A:EVERTZ TECHNOLOGIES LTD. (symbol ET on Toronto; www.evertz.com) makes video and audio systems for telecommunications and other media industries.
The company sells its hardware and software to content creators, broadcasters, specialty channels and TV service providers. Customers use them to support complex digital and high definition television (HDTV) networks as well as high-bandwidth Internet services.
Customers have used Evertz’s hardware at events such as the Sochi Olympics in Russia, the FIFA World Cup, the Commonwealth Games and the U.S. midterm elections.
The company’s products aim to improve the efficiency of its clients signal routing, distribution, monitoring and content management. They also help businesses automate manual processes, which reduces their costs.
Evertz’s revenue rose 30.0%, from $293.4 million in 2012 to $381.6 million in 2016 (fiscal years end April 30). The company’s earnings rose from $0.81 a share (or a total of $60.0 million) in 2012 to $0.88 (or $65.2 million) in 2013. Earnings fell to $0.85 a share (or $63.5 million) in 2014, partly due to higher research costs. Earnings then recovered to $0.87 a share (or $66.4 million) in 2015, and reached $0.94 a share (or $70.9 million) in 2016.
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In the three months ended January 31, 2017, Evertz’s overall revenue declined 8.7%, to $91.1 million from $99.8 million a year earlier. Its revenue from Canada and the U.S. increased 6.0% during the quarter to $56.8 million (62% of total revenue). The company’s revenue from other countries (38%) declined 25.7% to $34.3 million.
In the quarter, earnings per share fell sharply, to $0.13 from $0.33, on higher research spending as well as foreign-exchange losses due to the sharp rise in the U.S. dollar.
On January 31, 2017, the company held cash of $64.1 million, or $0.85 a share. It had almost no debt. Evertz also spends a high 19% of its sales on research.
The stock trades at 15.8 times the $1.06 a share the company is likely to earn for all of fiscal 2017. The shares yield 4.3%. In December 2016, Evertz paid a special dividend of $1.10 per share.
The company’s leading position in its niche market and its high research spending add to its appeal. However, its success could prompt much larger makers of electronic equipment to enter the market.
Inner Circle recommendation: Okay to hold, but only for aggressive investors.
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