Planar Systems (PLNR)

I believe that Planar Systems (PLNR) represents a good investment "gamble" at it´s current price of about $9.50. The company has low downside risk and significant upside should growth resume in the coming year or two.

Business:  Planar (PLNR) is a leading provider of flat-panel display hardware and software solutions for demanding medical, retailing, industrial and commercial applications. Hospitals, shopping centers, banks and businesses of all sizes use Planar display technology to help connect people, information and ideas. The best way to get a sense of what this company does is to visit their website at: www.planar.com/. Interestingly, the company´s 10K states that "Products sold to Dell comprised 19% of total consolidated sales in each of fiscal 2004, 2003 and 2002." So if you have bought a flat panel display from DELL, it could have been a PLNR display.

What happened here? PLNR´s stock has nosedived from the high 20´s to it´s current price of about $9.50. The reason for the drop? A huge fall-off in sales and declines in gross profit margin over the last year or so. The reason: It´s the same old story of a product that at first targeted a huge growth market and then morphed into a highly competitive and  commodotized business. From the company´s last 10K: "In the first quarter demand for digital imaging products was softer than expected. Early in the second quarter, the Company declared a strategy of maintaining its product leadership position while also establishing a price leadership position. We also increased our emphasis on alternative distribution channels, leveraging existing relationships in our Commercial business. " " During the fourth quarter, there was a sharp drop in retail prices which resulted in sales at below-target margins. Our value proposition and brand continue to resonate with our channel partners and their customers." In any case, what I like here is the company is in the dumps and the stock is depressed. That gets me interested.

Why is the downside now minimal? It´s simple. Despite a drop off in business and what are seemingly huge losses, PLNR has been piling up cash. In fact, during fiscal 2005 the company added over $30 million in cash to its books. PLNR has about $0 in debt. Overall, the company exited fiscal 2005 with $65 million in cash, or about $4.40 per share (there are approximately 14.7 million shares outstanding). So almost half the company´s market cap is in cash, providing strong downside protection and also excess cash to either distribute to shareholders or invest wisely in future product development. Also, what is interesting is the company´s sales decline has seemingly bottomed out. During the last quarter, the company reported a 4% increase in sales Q over Q and expects flat sales in the upcoming quarter. In total, PLNR is a company with estimated annual sales of $200 million. Yes, the margins are horrendous in the business, but on $200 million, I figure PLNR can pull in at least $50 million in gross profits. So assuming a worst case scenario, I believe the stock is worth at least 1X Gross Profit + Cash, or about $7.80 per share. That´s about a 20% downside from here. It´s also a price which is very unlikely to be reached again because as noted above it appears that company´s business has stabilized and the market has already priced in a bottom here.

• What´s to like here and what´s the upside? The first thing I like is that the company recently appointed a new chief executive officer in September. From the company´s PR:  Gerry Perkel, age 50, was most recently the President and Chief Executive Officer of Merant PLC, a provider of ECM (enterprise-change management) software that was acquired by Serena Software in 2004. Previously Mr. Perkel was president of the Office Printing Business at Xerox, a multi-billion dollar segment of Xerox's business. Prior to Xerox, he was president of the Color Printing and Imaging Business of Tektronix, where under his leadership the business experienced impressive growth. Mr. Perkel has had significant sales, marketing and general management experience during his affiliation with these companies. A quick Google search revealed that Perkel sold Merant, PLC for over $300 million. I also looked up Merant´s SEC filings and dug this up: Mr. Perkel joined us on September 20, 2001 as the company's President and Chief Executive Officer, and was appointed an executive director on the same date. He joined us from Xerox Corporation where he served as senior vice president and president of the Office Printing Business. He joined Xerox in January 2000 when Xerox acquired the Color Printing and Imaging Division of Tektronix, Inc., where he served as president. Mr. Perkel serves as a board member for the Juvenile Diabetes Research Foundation. He holds a bachelor of science degree in system science engineering from the University of California at Los Angeles. Interestingly, Perkel came into Merant during a major downturn in the IT market, stabilized the company, returned it to profitability and sold it. Doesn´t PLNR sound like a similar situation? Also, Perkel is highly incentivized to get PLNR´s stock moving: The guy has 240,000 options at an exercise price of $7.85 per share (the “Option”).  Twenty-five percent (25%) of the shares covered by the option start vesting on September 29, 2006. Plus, Perkel will get seventy-five thousand (75,000) shares upon achievement of the $10 Stock Price, and  seventy-five thousand (75,000) of the Shares will vest upon achievement of the $12 Stock Price Target. You can bet the stock is over $10 next September.

• Also, a simple analysis will reveal that PLNR still has large potential growth for it´s products, assuming it attacks the right end markets. As the CEO states,  "As I have looked at Planar over my first few weeks I can see both challenges and opportunities upon which to build. We have a very profitable Industrial Business Unit anchored with our world class EL technology base. Our challenges are to seek out growth opportunities for this highly differentiated technology position. We have a Medical Business Unit with some good growth opportunities ahead. We have been retooling this business to pursue such growth and in parallel drive enhanced profitability. Our Commercial Business Unit offers high unit volumes which enable supply chain and distribution advantages", said Perkel."Our focus is on how to leverage the cost reductions taken two quarters back to create sustained profitability while we develop our plans to drive profitable growth. We are reviewing all of our business areas and technology developments with an eye to generating growth in revenues, profits and shareholder value," concluded Perkel. Overall, I´m confident that there is growth potential here in various new end markets and PLNR has the cash and relationships to generate revenue growth. More importantly, as we move into fiscal 2006, PLNR will be  facing easy year over year comparisons, with  revenues increasing steadily throughout the year and earnings gains reported as compared to losses. I have found that when a company begins to show some revenue growth and the financials show gains as compared to losses, the stocks outperform (I will explain why in a future post).

What´s the potential upside here? A look at historical financials, and some quick number crunching will reveal that PLNR can earn at least a $1.00 a share if revenue growth resumes. So I´ll say the stock can be at $15 - $20 per share in a year or so. That´s about a 50% - 100% gain.

One final check here: I looked at the proxy statement and no one shareholder controls more than 20% of the outstanding stock.