Rating Update: Stock Rating F-Lowest (6/11/19)-Vuzix Corp (VUZI).

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BUSINESS

Vuzix Corporation designs, manufactures, markets, and sells wearable display devices in the United States and internationally. Its wearable display products include augmented reality (AR) smart glasses for various enterprise and commercial users and applications; and video viewing glasses for on-the-go users as mobile displays for entertainment and gaming. The company’s products also include binocular wearable displays that contain two micro displays mounted in a frame attached to eyeglass-style temples or stereo headphones; monocular smart glasses products for the enterprise, industrial, and commercial markets, as well as video headphones; AR wearable products, which provide users with a live, direct, or indirect view of a physical real-world environment.
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INVESTMENT RATING

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VUZI is expected to be a major Value Eraser reflecting capital returns that are forecasted to be below the cost of capital.

Vuzix has a current Value Trend Rating of F (Lowest Rating).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing consistent signals. Vuzix has a poor Appreciation Score of 17 and a very low Power Rating of 12, with the Lowest Value Trend Rating the result.

Vuzix’s stock is selling significantly above targeted value. The current stock price of $3.62 compares to targeted value 12 months forward of $1.
Vuzix’s low appreciation potential results in an appreciation score of 17 (83% of the universe has greater appreciation potential.)
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Vuzix has a Power Rating of 12. (This very low Power Rating indicates that Vuzix only has a better chance of achieving attractive investment performance over the near to intermediate term than 12% of companies in the universe.)
Factors contributing to this very low Power Rating include: recent price action has been extremely unfavorable; and is in a slightly weakened position current. An offsetting factor is earnings estimate behavior for Vuzix has been slightly favorable recently.

INVESTMENT PROFILE

Vuzix’s financial strength is average. Financial strength rating is 51.
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Relative to the S&P 500 Composite, Vuzix Corp has slightly more Value than Growth characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that VUZI is lower risk. Low historical profitability is a relative weakness for Vuzix. Vuzix’s valuation is low: low dividend yield, low P/E ratio, and low price/book ratio. VUZI has unusually low market capitalization.

CURRENT SIGNALS

Vuzix’s current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; falling tax keep rate; and falling leverage.

Vuzix’s current technical position is very weak. The stock price is below its 200 day moving average which is in a downtrend.

ALERTS

Vuzix Corporation (NASDAQ: VUZI) has benefited from exceptional positive changes in investment behavior: the stock rose on very heavy volume, and positive upside/downside volume developed.
In light of this we are reviewing our current Overall Rating of F. This review will be completed in the next several days.
On 6/11/19, Vuzix Corporation (NASDAQ: VUZI) stock enjoyed a major increase of 22.7%, closing at $3.62. Moreover, this advance was accompanied by exceptionally high trading volume at 829% of normal. The stock has risen 98.9% during the last week but has been extremely weak relative to the market over the last nine months.

CASH FLOW

In 2018, Vuzix generated a significant increase in cash of +$2.37 million (+16%). Sources of cash were larger than uses. Cash consumed from 2018 EBITDA totaled -$20.31 million. Non-operating sources contributed +$0.08 million (-0% of EBITDA). In 2018, there were no cash taxes paid. Re-investment in the business amounted to -$8.33 million (+41% of EBITDA). In 2018, debt investors had no impact on cash while equity investors contributed +$30.95 million (-152% of EBITDA).
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Vuzix’s Non-operating Income, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Vuzix Corp Peer Group. (Since 2013 Non-operating Income, %EBITDA has accelerated very sharply.) In most years, Vuzix was in the top quartile. Currently, Vuzix is above median at -0% of EBITDA (+$0.08 million).

Vuzix’s Cash Taxes, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Vuzix Corp Peer Group as well. In most years, Vuzix was in the top quartile and second quartile. Currently, Vuzix is slightly above median at 0% of EBITDA ( $0.00 million).

Vuzix’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Vuzix Corp Peer Group. (Since 2016 Business Re-investment, %EBITDA has sharply decelerated.) In most years, Vuzix was in the top quartile. Currently, Vuzix is upper quartile at +41% of EBITDA (-$8.33 million).

Vuzix’s Debt Investors, %EBITDA has experienced a very strong overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Vuzix Corp Peer Group. In most years, Vuzix was in the top quartile. Currently, Vuzix is slightly above median at +0% of EBITDA ( $0.00 million).

Vuzix’s Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Vuzix Corp Peer Group. (Since 2016 Equity Investors, %EBITDA has accelerated sharply.) In most years, Vuzix was in the second quartile. Currently, Vuzix is slightly above median at -152% of EBITDA (+$30.95 million).

Vuzix’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Vuzix Corp Peer Group. In most years, Vuzix was in the second quartile and top quartile. Currently, Vuzix is upper quartile at -12% of EBITDA (+$2.37 million).
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Vuzix’s Cash, %Revenue has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Vuzix Corp Peer Group. (Since 2015 Cash, %Revenue has experienced a very sharp decline.) In most years, Vuzix was in the lower quartile. Currently, Vuzix is lower quartile at +213%.

PROFITABILITY

Vuzix’s return on equity has eroded very significantly since 2011 accelerating very sharply after the 2016 level.
The productivity of Vuzix’s assets declined over the full period 2009-2019: asset turnover has suffered a very strong overall downtrend but it experienced a very sharp recovery after the 2016 low.
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Vuzix’s return on equity is substantially below median (-93.3%) for the four quarters ended March, 2019.
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Operating performance (pretax return on assets) is lower quartile (-80.5%) reflecting asset turnover that is at the upper quartile (0.28X) and above median pretax margin (-288.%).
Tax “keep” rate (income tax management) is at the upper quartile (100.0%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is at the lower quartile (1.16X).

GROWTH RATES

There are no significant differences between Vuzix’s longer term growth and growth in recent years.
Vuzix’s historical income statement and balance sheet growth are not available.

Annual revenue growth has been -22.0% per year. (More recently it has been 37.2%.)

Total asset growth has been 6.3% per year.

Annual E.P.S. growth is not available.

Equity growth has been 0.4% per year.

Vuzix’s consensus growth rate forecast (average of Wall Street analysts) is 20.0% — substantially above the average of the historical growth measures.
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Relative to the Vuzix Corp Peer Group, Vuzix’s historical growth measures are erratic. Total asset growth (6.3%) has been below median. Revenue growth (-22.0%) has been lower quartile. Equity growth (0.4%) has been lower quartile. E.P.S. growth is unavailable.

Consensus growth forecast (20.0%) is at the upper quartile.
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PRICE HISTORY

Over the full time period, Vuzix’s stock price performance has been variable and slightly below market. Between April, 2013 and June, 2019, Vuzix’s stock price rose +55%; relative to the market, this was a -14% loss. Significant price moves during the period: 1) June, 2018 – May, 2019: -72%; 2) January, 2014 – January, 2015: +164%; 3) July, 2013 – December, 2013: +104%; 4) May, 2013 – July, 2013: -69%; and 5) April, 2013 – May, 2013: +164%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -67.2% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through May, 2019 of -67.2% is lower quartile relative to Vuzix Corp Peer Group.

Current 5-year total return performance of -4.9% is lower quartile relative to the S&P 500 Composite.
Through May, 2019, with lower quartile current 5-year total return of -4.9% relative to S&P 500 Composite, Vuzix’s total return performance is lower quartile relative to Vuzix Corp Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, VUZI’s overall valuation is exceptionally high. The highest factor, the ratio of enterprise value/revenue, is upper quartile. Ratio of enterprise value/assets is upper quartile. Price/equity ratio is above median. Price/earnings ratio is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable.
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Vuzix has a major value gap compared to the median valuation. For VUZI to rise to median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 11.44X to 23.51X. If VUZI’s ratio of enterprise value/revenue were to rise to 23.51X, its stock price would be lower by $3 to $7.
For VUZI to hit lower quartile valuation relative to the Vuzix Corp Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 11.44X to 9.48X. If VUZI’s ratio of enterprise value/revenue were to fall to 9.48X, its stock price would decline by $-1 from the current level of $3.62.

VALUE TARGETS

VUZI is expected to be a major Value Eraser reflecting capital returns that are forecasted to be below the cost of capital.
Vuzix’s current Price Target of $1 represents a -66% change from the current price of $3.62.
Vuzix’s low appreciation potential results in an appreciation score of 17 (83% of the universe has greater appreciation potential.)
Reinforcing this low Appreciation Score of 17, the low Power Rating of 12 contributes to an Value Trend Rating of F.
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Vuzix’s current Price Target is $1 (+35% from the 2018 Target of $1 but -66% from the 06/11/19 price of $3.62). This dramatic rise in the Target is the result of a +35% increase in the equity base and a +0% change in the price/equity multiple. None of the Value Drivers has an impact on the price/equity multiple. The forecasted increase in growth has no impact on the multiple. The forecasted increase in cost of equity also has no impact and the decline in return on equity didn’t either.
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PTR’s return on equity forecast is -10.% — significantly below our recent forecasts. Forecasted return on equity erratic but little changed between 2011 and 2018. The current forecast is significantly below the 2011 low of 4%.

PTR’s growth forecast is 19.0% — substantially above our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2011 and 2018. The current forecast is significantly above the 2017 low of 2%.

PTR’s cost of equity forecast is 5.9% — in line with recent levels. Forecasted cost of equity suffered a dramatic, variable increase between 2013 and 2018. The current forecast is above the 2013 low of 3.6%.
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At Vuzix’s current price of $3.62, investors are placing a negative value of $-1 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 7.0% per year, and a return on equity of 4.0% versus a cost of equity of 4.6%.
PTR’s 2020 Price Target of $1 is based on these forecasts and reflects an estimated value of existing assets of $0 and a value of future investments of $1.

About John Lafferty 47332 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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