$8.51 / (PLNR-NASDAQ)
NOTE TO READERS: ALL NEW COMMENTS SINCE LAST REPORT HIGHLIGHTED.
PLNR’s fiscal year ends on September 30th.All calendar references are to the fiscal year.
Overview
A decision to invest in Planar Systems (PLNR) should depend upon your view of the following: 1) the affect of competition in the medical business on profitability 2) the future of spending in its industrial business 3) the ability of Planar to turn a profit in the commercial desktop market where there is little differentiation and large competitors and 4) the possibility of success with investments in new products and markets. Further, Planar announced a new investment strategy for sales and marketing in Europe and developed a complete product offering for the retail market. This will have a significantly negative impact to earnings, and its success will be critical to the investment thesis surrounding Planar.
Investment Positives: / Investment Risks:- Planar is a leading player in high performance flat panel displays
- Flat panel displays are growing as they take share from traditional CRT displays
- Planar tries to compete in niche markets where it can differentiate itself
- Increasing competition in high-margin medical applications threatens Planar’s business model and also led to a recent earnings disappointment
- Planar has struggled in commercial desktop business after a failed promotion with Dell and competition from high volume vendors
- Increased investment to open up new growth initiatives.
Planar Systems located at 1195 N.W. Compton DriveBeaverton, OR97006, develops and manufactures high-performance electronic display products, employing a variety of technologies including active matrix liquid crystal displays (AMLCDs), passive matrix liquid crystal displays (PMLCDs), proprietary EL flat panel displays and plasma displays. The company provides solutions for the medical, industrial and commercial desktop markets, which contributed 31%, 21% and 48% of revenue respectively in 2004.In 2002, Planar acquired Dome Medical Imaging business and became one of the industry’s leading suppliers of high-performance, high-resolution medical displays.
In medical, Planar has performed well and has almost completely integrated Dome. Planar now focuses on higher margin digital radiology and high value-add medically certified platforms. In-spite of this being a somewhat differentiated market, analysts are worried about low-price competition over the long-term and expect ASPs to decline at a faster rate going forward. Planar has recently experienced weakness in medical caused by component shortages according to the company; however, some analysts also believe Asian competition was partially to blame. To offset this, Planar has reduced costs by sourcing components from Asia and rationalizing manufacturing.
In industrial, Planar is the dominant supplier to rugged applications, such as ATMs and gas pumps. This division has been adversely impacted by the poor economy and revenues are expected to fall by a mid single digit rate for the year. Some analysts believe execution has also been a problem in the industrial business. In the commercial desktop business, Planar is trying to establish a market niche for itself by providing high-end displays, but analysts are skeptical about how successful this will be given that this market generally has little differentiation or IP content and is dominated by low cost producers, such as Dell, NEC, HP, Sony and others. PLNR has introduced a product portfolio/segmentation strategy that analysts believe should help it meet competition in both medical and commercial. However, concerns about medical competition, increased investments in medical and industrial (resulting in tough compares), and a relatively lower multiple for the dominant commercial segment still remain.
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Key Dates
April 13, 2005 FQ2 Earnings Announcement
Consensus: Sales $63 million, EPS $0.01
Sales
Annual Estimates / Quarterly Estimates9/2005 / 9/2006 / 03/2005 / 06/2005
Most Recent Consensus / 266 / / 295 / 63 / 67
Zacks Consensus / 272 / / 306 / / 66 / / 69 /
Planar Systems reported December Quarter revenue of $63.1 millions, down 7% Q/Q. Revenue of Planar comprises of Commercial Display business, Medical Display business, and Industrial Segment revenue.
Commercial Display Business: Comprising 45% of revenue, Commercial Display Business Revenue decreased 9% year over year and 10% sequentially to $28.2 million. During the quarter, PLNR was able to sell-through much of the excess and higher-cost inventory that it built up during the F4Q. The reduction of this inventory came at a cost though. Management sized the loss for the commercial business at around $0.07 per share. The good news is that PLNR believes its current inventory is more in line with current monitor costs in the market. In addition, the worst of the price erosion in the LCD market appears to be over, at least for the time being. However, analysts believe PLNR will still find it challenging to return this business to profitability in the current quarter.
Medical Display Business: Comprising 35% of revenue, Medical Display Business increased 16% year over year to $20.6 million. Revenues were down 9% sequentially, reflecting the normal seasonal pause PLNR has experienced in this market related to the RSNA Show in Chicago in late November. Analysts believe that the digital imaging business registered a strong quarter, as did components, including the company’s higher margin electroluminescent (EL) components. PLNR has received design wins for its EL components in both Europe and China, which bodes well for the profitability of this business in F05.
Industrial Display Business: Comprising 23% of revenue, Industrial Display Business rose slightly to $14.3 millions from $14.2 millions in the previous quarter. EL display component demand appears to have been stronger than expected. The new retailing display system PLNR introduced in F4Q did not contribute meaningfully to revenues, although PLNR has high hopes for this product line over the next 1-2 years.
1Q:F05 / 4Q:F04 / Q/Q in % / 1Q:F04 / Y/Y in %Medical / 20,600 / 22,700 / -9.3 / 17,800 / 15.7
Industrial / 14,300 / 14,200 / 0.7 / 14,100 / 1.4
Desktop Monitor / 28,200 / 31,200 / -9.6 / 31,000 / -9.0
Total Sales / 63,088 / 68,020 / -7.3 / 62,900 / 0.3
Sales increased in Europe as a direct result of the company's investment in sales and marketing expansion in the region. First quarter sales outside the United States reported at 17% of total revenue, up 4% from FYQ4.
Going forward, analysts expect some growth in digital imaging product, specifically in Europe, to be offset by declines in the industrial sector, as those wins tend to be lumpier. Analysts are currently assuming modest growth in the commercial division, driven by the stabilization of panel prices and a better inventory position. Any favorable move in market demand could provide upside to the next quarter results.
Analyst sales estimates for FY 2005 range from $263.9 millions (Needham) to $268.1 million (SG Cowen, CIBC). Sales estimates for FY2006 range from $291.3 millions (Needham) to $302.2 millions (CIBC). The analyst on the low-end for both years (Needham) is concerned about increased investment in an attempt to jump start the slow-growth Medical and Industrial business. Though at the high-end for both years, (CIBC) believes that competition is expected to continue and visibility as to the rate of improvement is difficult to gauge.
Margin
Planar reported gross margin of 21.7%, up slightly from 21.0% in the September quarter, but below company guidance of 23%. The high cost of monitor finished goods inventory was the primary source of weakness. Analyst (Needham) believes that margins remain depressed due to the eroding profitability of the Commercial business. Analysts have reduced their March quarter gross margin assumption to 22%, anticipating continued volatility in the commercial market.
Consensus Margins2004 / 2005E / 2006E
Gross Margin / 23.2% / 22.3% / 23.9%
Operating Margin / 5.0% / 1.0% / 3.0%
Net Margin / 3.6% / 0.7% / 1.9%
Earnings Per Share
Annual Estimates / Quarterly Estimates9/2005 / 9/2006 / 03/2005 / 06/2005
Most Recent Consensus / 0.15 / / 0.44 / / 0.01 / / 0.05 /
Zacks Consensus / 0.23 / / 0.44 / / 0.03 / / 0.05 /
Zacks Most Accurate Consensus / 0.15 / / 0.44 / / 0.01 / / 0.05 /
For the December, Quarter Planar reported EPS of $0.00. Earnings were impacted by several items, including a charge for bad debt related to the insolvency of a customer costing PLNR approximately $0.03 per share, a charge to write down the market value of a Taiwanese display company, Topvision costing PLNR about $0.01-0.02 per share. In addition, unfavorable currency exchange rates increased costs in Europe, penalizing earnings by around $0.01 per share. Thus, taking these items into account, bottom-line results were more in line with the high end of guidance. Analysts believe that EPSs are likely to remain under pressure in F05 due to increased investments to open up new growth opportunities in its medical and industrial display business and slower growth in what is at best a marginally profitable commercial display business. F05 is very much a transition year for PLNR and analysts believe it will be at least 2-3 quarters before they can gauge the success of the new growth initiatives.
Analysts’ EPS estimates for FY 2005 range from $0.07 (D.A. Davidson) to $0.15 (CIBC) and for FY2006, estimates range from $0.32 (D.A. Davidson) to $0.44 (CIBC). The analyst on the low-end for both years (D.A. Davidson) is concerned about new growth initiatives. The analyst on the high-end for both years (CIBC) believes that new Industrial products appear to be gathering some traction, especially the retail kiosk solution where customer trials are progressing.
Target Price/Valuation
Only one analyst (D.A. Davidson) has provided a price target of $9.50.
Long-Term Growth
In the desktop space, flat panel displays are growing rapidly as they take share from traditional CRTs due to their smaller profile and falling prices. Competition in desktop has been intense as the products have very little intellectual property or differentiation and large competitors such as Sony, NEC, Dell and others dominate the business. The medical Flat panel market has been less competitive as the products are more specialized, but as the market grows competitors are entering the business, which will threaten pricing and Planar’s market share. One analyst believes that digitization of medical records of patients and radiograph images will drive growth in medical. The industrial market has traditionally been a niche market as Planar provides customized products for small applications and growth is stagnant with recent declines due to poor economic conditions. However, competition in industrial also appears to be increasing as larger players are entering the niche part of the market. Overall, on a unit basis, flat panel displays are one of the fastest growing areas within technology. However, pricing is falling rapidly as large players have been attracted to the market and barriers to entry are minimal given the lack of intellectual property in most of the product areas.
Individual Analyst Opinions
POSITIVE RATINGS
None
NEUTRAL RATINGS
CIBC – Stock is rated Sector Performer. The analyst believes that despite pleasing signs of life in the Industrial segment, visibility as to the near-term is still lacking, suggesting investors to stick to the sidelines for the foreseeable future.
DA Davidson – The stock is rated Neutral with a $9.50 price target. Analyst believes that the volatility of the commercial division, which contributes nearly half of total sales, keeps them on the sidelines. Longer term, analyst expects profitability to remain constrained for the remainder of the year, as the company continues to invest in new products and markets.
Needham – Stock is rated Hold. The analyst believes this is a transition year for PLNR and expects at least another 2 or 3 quarters time period, before it is able to gauge the success of new growth initiatives.
NEGATIVE RATINGS
None
NOT RATED
SG Cowen – Although some of PLNR’s initiatives are positive, the analyst is concerned about price competition and margin erosion in digital radiology as well as competition in medical and industrial segments. Also believes a relatively lower multiple for the dominant commercial segment likely limits the upside in the shares.