Silicon Graphics International: SGI 9.80 [+0.04]
February 10, 2010
High Cash Stock Review on Silicon Graphics International (SGI) - A High Performance Technology Company
by Randy Durig, CEO of Durig Capital
At Durig Capital, we like SGI because it fits our model! Our goal with each High Cash Stock Review (HCSR) is to select, purchase and monitor companies in an effort of gaining outstanding performing investments while minimizing risk for our clients. We will cover part of our review and selection process as well as explain why SGI has currently become one of our HCSR selections.
First, you should know the following: On April 1, 2009, SGI filed for Chapter 11, again, and announced that it sold all of its assets to Rackable Systems for $25 million. The sale increased to $42.5 million and was finalized on May 11, 2009. At the same time, Rackable announced their name change, Silicon Graphics International, as their global name and brand.
Step 1 – We first search for companies with pristine balance sheets.
After the purchase and name change, the new Silicon Graphics International (SGI), after completion of the December quarter, has roughly $154.8 million in cash, or $5.10 per share, and no long term debt. SGI has a very strong balance sheet.
Step 2 – We like extremely low enterprise values.
When you subtract out the cash from the enterprise while remembering that SGI has no debt, their enterprise value (the value of the ongoing operations of the company) is actually extremely small for a company that just completed a single quarter with over $150 million in pro-forma revenues.
If you subtract out all the cash from the remaining value of the company, the ongoing business is only worth about $112.65 million dollars. This makes the business value smaller than the just completed quarterly revenues, which is remarkably low for a leading computer company with a run rate well above $500 million in revenues. SGI is achieving size, scale and many competitive advantages while only having a hand full of competitors. Additionally, having an impressive ability to leverage new business revenues in both storage and services while attaching more value onto to their established and strong postion in server sales, they have a nice business model.
Step 3 – Is the operation or enterprise driving value to their shareholders?
SGI receives another yes. They had an outstanding quarter with an $0.18 pro-forma profit, which is strikingly above the average estimate of a loss of $0.08 while solidly expanding and, better yet, forecasting a continually expanding margin for the year. Possibly even more impressive is that SGI grew their cash this quarter by over $31 million, which was a whopping 25% greater then just their last quarter.
An impressive metric measurement of their execution was that the new SGI’s international revenues are up about 12 times in one year to 29% of total revenues. With this knowledge and the history of SGI, the new SGI has strong execution and growth.
Now knowing the excellent performance on the international markets, SGI’s current forecast of doubling storage business in three years to 30% of total revenues seems very palatable. In most companies this would be seen as a Hercules-type of event, especially in this economy; For SGI, though, it’s just part of normal execution.
Step 4 – Is this a good business?
We believe this is a very good business with both new and established clients adopting a slow but steady migration to a cloud-computing concept of computing, while at the same time the cost of high performance computers is rapidly falling. This allows for a high growth, low cost, open-architecture computer company to be in a very enviable position. SGI is a leading developer of enterprise-class, high performance systems that feature individual configurations that could include thousands of Intel x64 based microprocessors with Linux operating systems. The standard combination of Intel x64 architecture and Linux operating environment combined with their own differentiated Linux extensions gives companies that purchase SGI advantages in improved performance, simplified system management, reduced operating cost and a much more robust development environment.
When Rackable purchased the assets of SGI, they also attained over 700 patents in the high performance computers as well as many large customers.
Step 5 – Is the Train Wreck and then the fog from the Wreck clearing?
When finding companies around cash value, often a “Train Wreck” is needed to drive value close to cash. With SGI, it was assumed it was a never ending train wreck, but some of the major concerns include:
- Questionable success of two uniquely different companies merging, knowing the more established one never gained success in years.
- SGI’s history of having great technology, but poor sales or execution.
- Questioning if Rackable would be able to provide it’s high growth, while accruing a much larger company.
- In 2006 and 2009, SGI went into bankruptcy giving SGI without proper due diligence – the concept that SGI is a perennial looser.
I believe all of these factors and more have been priced into this company’s current price. First of all, SGI will survive if it’s profitable with a high pile of cash and no debt.
Rackable Systems (the purchasing company) had a completely different story and went public in June, 2005. According to Gartner’s October 2007 server report, Rackable Systems was the fourth largest x86 server provider in North America. Also, in 2007, it was rated the fastest growing server provider in North America, outgrowing all the majors like Sun Mirosystem, Dell, Hewlett Packard and IBM on a unit percentage basis. With Rackable Systems (the little guy) purchasing SGI (a technology leader), this could come out far better than it has been price for.
The new SGI has now demonstrated over the last two quarters that the execution of Rackable Systems combined with the technological muscle of SGI to date has been a wonderful marriage, with some of the best execution in the business whether we perceive them having a low enterprise value or not.
Knowing that SGI has completed two excellent quarters in creating value for their shareholders and now that the new company has completed over 6 months of history, we ran the following two traditional valuations of SGI to put a value on the new company:
1. Price Earning or PE Based
Durig Capital is currently forcasting that SGI will produce an annual run rate of $0.72 per year pro-forma. With SGI’s margins, revenues and profits all expanding, SGI should at least achieve some industry parity in value. When the Diversified Computer Industry’s average PE of $17.55 is applied to SGI, this would give ongoing business a value of $12.63. Then, when you add the cash of $5.10 per share, we believe that SGI could achieve a stock market value of $17.73.
2. Revenue Based
If you value SGI at 2.48 times sales (again, the computer diversified sales average) using SGI’s guidance of $500 million in sales for their current year plus the $5.10 in cash currently on the books, it adds up to a $46.50 stock market value.
Either way, today you could easily demonstrate based even on the lowest result (the PE based valuation) that with SGI’s current model, low valuation and especially with their short term superb execution SGI could, and should in our opinion, be valued significantly higher.
It appears the top management is fairly compensated.
Absolutely yes, I and related accounts own this company. We started buying around $8.89 per share. I just wish I could raise the money and buy the whole company. We like to invest in profitable business enterprises that have almost zero or, like in SGI’s case, a very small enterprise value, very hard to copy business models and outstanding short term execution. I’m sure other successful business persons would also like to do the same. You can follow other Durig Capital High Cash Stock Reviews on our web site by clicking any of these: LAB, KHD, HCII and WCG.
Yahoo! Finance: SGI News
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Updated 3 February 2010.
|Dividend Yield – 5 Year Avg.||0.00||0.27||0.93||2.03|
|Payout Ratio (TTM)||N/A||3.37||13.00||31.17|
|Revenue to Employee (TTM)||928,240.60||954,308.14||522,758.26||776,721.49|
|Net Income to Employee (TTM)||-172,250.00||162,153.43||104,838.41||92,672.95|
|Receivable Turnover (TTM)||5.66||9.15||8.08||10.56|
|Inventory Turnover (TTM)||3.67||45.22||17.32||11.31|
|Asset Turnover (TTM)||0.77||1.12||0.70||0.88|
|% Return on Asset (TTM)||-14.30||13.21||9.53||7.00|
|% Return on Asset – 5 Year Avg.||-9.21||12.15||10.86||8.66|
|% Return on Investment (TTM)||-21.23||22.39||13.71||9.93|
|% Return on Investment – 5 Year Avg.||-12.01||20.74||16.54||12.44|
|% Return on Equity (TTM)||-26.80||26.38||21.50||17.48|
|% Return on Equity – 5 Year Avg.||-15.18||24.96||20.94||20.35|
|P/E Ratio (TTM)||N/A||17.55||23.28||19.81|
|P/E High – Last 5 Years||N/A||57.13||38.83||31.29|
|P/E Low – Last 5 Years||N/A||11.10||11.89||10.60|
|Price to Tangible Book (MRQ)||1.69||N/A||N/A||N/A|
|Price to Book (MRQ)||1.52||4.08||4.04||3.38|
|Price to Sales (TTM)||0.92||2.48||3.66||2.30|
|Price to Cash Flow (TTM)||N/A||14.12||18.04||13.72|
|Price to Free Cash Flow (TTM)||N/A||14.45||18.05||21.58|
|% Owned Institutions||69.02||N/A||N/A||N/A|
|% Gross Margin (TTM)||16.44||33.84||54.40||46.17|
|% Gross Margin – 5 Year Average||17.45||28.62||53.11||45.63|
|% EBITD Margin (TTM)||-16.64||21.13||23.08||22.50|
|% EBITD Margin – 5 Year Average||-0.76||14.04||20.30||23.15|
|% Operating Margin (TTM)||-21.02||18.54||18.40||16.68|
|% Operating Margin – 5 Year Average||-2.61||12.80||17.52||18.83|
|% Pre-Tax Margin (TTM)||-20.82||18.54||19.18||15.49|
|% Pre-Tax Margin – 5 Year Average||-5.41||13.74||16.72||17.79|
|% Net Profit Margin (TTM)||-18.56||13.08||13.86||10.56|
|% Net Profit Margin – 5 Year Average||-8.25||9.80||10.48||12.45|
|% Effective Tax Rate (TTM)||N/A||26.39||25.44||28.98|
|% Effective Tax Rate – 5 Year Average||N/A||26.57||24.54||30.10|
|% Return on Equity (TTM)||-26.80||26.38||21.50||17.48|
|% Interest Coverage (TTM)||N/A||11.98||10.11||12.12|
|Financial strength||SGI||Industry||Sector||S&P 500|
|Quick ratio (MRQ)||1.35||1.62||2.41||1.44|
|Current ratio (MRQ)||1.77||1.97||2.82||2.01|
|Long term debt to equity (MRQ)||0.00||17.80||30.70||69.10|
|Total debt to equity (MRQ)||0.00||19.90||35.50||75.90|