Tuesday, August 5, 2014


Well, Hutchinson Technology had an interesting quarterly earnings report.  The conference call was before trading on Friday.

They did report a decent estimate for next quarter's sales of 110-115 million units (about 130 million is break-even), which will still leave them with a slight loss, but probably positive cash flow, adjusted for any noise in the quarterly numbers.  They projected 25-30% of sales as DSA next quarter, roughly in line with last quarter's guidance.  In last quarter's conference call, they projected the coming quarter to be nearing 30% DSA, the December quarter to be nearing 40%, and the following quarter to possibly be 60%.  The ramp up in DSA always seems to be three quarters away.  Maybe the DSA numbers will finally come in on schedule.  Management forecasts have been fairly accurate on other matters in the time I have been following the firm.  They will have higher revenues on those new programs.  So, it still seems likely that in the core business, they will not only be cash flow positive as we move ahead, but probably profitable in 2015.  Analyst estimates on yahoo aren't that optimistic, but I'm not sure how the bullish quarterly estimates for the December quarter square with the 2015 annual estimates, especially in the face of management estimates of DSA growth.

So, more of the same optimism, but not quite here yet, on the core business, which has been the state for longer than I would have preferred.  There is a bundle of bonds that are putable in 2015, which is a potential cash flow issue, but I don't think this warrants concern.  The bond market seems to agree.

But, they are finally providing some details on the new revenue sources.  They are using their technologies to market a new product that stabilizes the lens on smartphone cameras.  They were very optimistic about their technological position on this product, and the potential profits here are tremendous.  This is a huge free option on the value of the enterprise.

Now there are several questions, some of which are very difficult to quantify: How quickly does DSA continue to ramp up?  How much added market share do they capture in the DSA programs?  How quickly and how deeply do the new smartphone products expand?

The answers to these questions could justify an eventual price 10x the current price.  So, there is the additional question of how forward looking the market for the firm's shares is.  With the level of uncertainty here and management's 7 year track record on revenue, that isn't likely to be very far.  The market did respond well to Friday's report, but even here, compared to the level of efficiency we normally see in the stock market, this is the picture of inefficiency.  Here is the graph of intraday trading on Friday, after the conference call that finished before the market opened.

I suspect that the weekly, monthly, and quarterly stock charts will have a similar appearance.  In a microcap with high levels of uncertainty and large scale changes in sentiment, the market usually eventually gets to where it should get, but it can be very logy about it.  That is really the necessary condition for financial speculation - markets that are efficient but logy.

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