"Cash Is King" Tech Play

12/16/2005 12:00 am EST


Mark Mowrey

Senior Analyst, Al Frank Asset Management

"Tech investors are a fickle bunch," says Mark Mowrey, editor of the TechValue Report. "They love you on the way up, but heaven forbid your entering a period of relative weakness." Here, he looks at one such out-of-favor stock, selected as his 'Stock of the Month."

"Applied Films (AFCO NASDAQ) has been seemingly dismissed for failing to meet lofty standards for growth. Sure, 2005 has proved a weak year. But the stock shows it—just as it offers a fine price to buy in to future growth potential. Going on 30 years old, Applied Films is a leader in the market for equipment used to spread thin films on basic materials. In end products ranging from architectural glass to solar panels, these films impart useful characteristics like light and heat protection in glass windows and electrical conductivity in components intended for solar energy applications.

"Historically, the company has had little trouble identifying and generating revenue from new markets. From its core in architectural glass, AFCO has surfed the flat-panel display wave, boosting revenue from $31.5 million in fiscal 1999 (ended June 1999) to $228.4 million in fiscal 2004. Also becoming more important were markets for specialized coatings on flexible surfaces, like the foil liner in potato chip bags and printable coverings for plastic bottles.

"Over that time, the company transitioned away from its start-up core of selling coated glass products to one based on the development and sale of equipment used to make such coated glass. From 26% of revenue in 1998, the proportion of total revenue from thin film coating equipment has grown to 100% today. The shift proved a smart one, lifting the company above the more commodity-oriented thin-film coated product market to the higher value-added equipment market, where it could gain greater leverage from its technological expertise by applying it to a broader set of end products.

"Until this year, that is, when investment in architectural glass and flat panel display manufacturing equipment slowed. Revenue dropped 20.3% to $182.2 million. Happily, gross margin still improved, but operating losses were large, as a market expansion-oriented R&D budget swelled. Other operating expenses grew to meet financial reporting requirements set by Sarbanes-Oxley legislation

"Significant development spending has been allocated to solar technologies, too. With energy costs stubbornly high, solar options have become far more affordable. Meanwhile, the company recently sold its stake in a Chinese glass coating joint venture, furthering the shift away from this non-core business. On the flip side, it also announced the purchase of Vacuum Coating Technologies, a maker of thin film deposition equipment for the architectural and auto glass markets. The purchase should help AFCO gain more work in China. Best, the already-closed acquisition should prove accretive in the first year.

"Fancy technologies aside, Applied Films remains a highly attractive stock from a valuation standpoint and is one that falls within our ‘Cash is King’ category. With approximately $11.42 in cash and equivalents on the balance sheet, AFCO retains great financial flexibility. Excluding that figure, the shares trade at less than 16 times trailing earnings, and we remain avid buyers at the latest close. Applied Films, our latest ‘stock of the month’ is a buy."

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