Inside Wall Street: After an Early Stumble, SMART May Be a Smart Buy Now

Gene Marcial's Inside Wall StreetGoing public is a prized quest for many private companies. But at times, there's a stiff price to pay.

SMART Technologies (SMT) went through a tumultuous baptism of fire not long after it went public in July, at $17 a share. Barely four months after the initial public offering, the stock abruptly cratered -- to a low of $7.93 on Nov. 9. What happened? Turns out, the IPO was ill-timed, as management failed to see what could befall a young IPO that disappoints too soon.

The company is a leading provider of touch-sensitive learning and collaboration products. Its core product, "interactive whiteboards" and complementary hardware and software systems, target education, business and the public sector. Its technology has attracted Intel (INTC), which has formed a strategic alliance with SMART and taken a minority stake in it.

But investors, SMART learned soon, can be quite vengeful when expectations are dashed. On Nov. 9, the company reported strong results, but management nonetheless lowered its revenue forecast for 2011. It conceded that it has seen "slower than anticipated sales" in a newly acquired business, so it factored in a "more conservative growth assumption in the North American market in the second half of the fiscal year." Part of the problem was the crimped U.S. budget for education.

An Overreaction?

That was enough for some investors to bail out. And analysts rushed to cut back their estimates and price targets, including those who stayed bullish on the stock. A rash of class actions has been filed since, accusing management of violating the Securities Act in failing to disclose in its IPO filing and prospectus that a second-quarter slowdown was hurting sales.

But that disconcerting problem for IPO investors turned out to be an opportunity for later investors who snapped up shares at much reduced prices. Their buying lifted the stock to more than $9 a share by Dec. 9, and the bulls believe it has become way undervalued and see SMART rising to $17 again in a year.

"With its stock down some 30%, SMART has the potential of climbing about 40% higher from its current price, having demonstrated since 2006 that it could sustain a yearly earnings growth rate of as much as 30%," says Gregory MacArthur, president of consulting firm Viewpoint2000. He sees SMART earning 70 cents a share in fiscal 2011, ending March 31, and $1.05 in fiscal 2012. SMART earned 68 cents in fiscal 2010.

MacArthur says SMART's penetration of its markets is still low. Analysts at Bank of America Merrill Lynch put the rate at about 7% globally and point out that market growth is relatively high, at about 22% annually. As the leading global vendor, SMART's market share is about 48%.

A Boost for Learning and Collaborating

MacArthur says SMART's flagship product, the SMARTBoard Interactive Whiteboard System, accounts for 70% of total revenues. It's a touch-sensitive digital whiteboard connected to a computer that enables the user to have touch control of computer applications, write in digital ink and share and save work. In the classroom, the system allows teachers to create and manage lessons interactively, and it allows students to interact directly in opening files, lessons or websites, and allows them to save or send their homework.

In a word, the interactive whiteboard enhances the students' learning experience. It facilitates collaboration and communications in group projects. In the corporate world, customers are able to collaborate from multiple locations, notes MacArthur. The system allows business users to access, write over, save, share and interact with documents and information, whether they're in the same room or across the continent.

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Morgan Stanley continues to rate the stock as overweight but has lowered its price target to $14 a share from $17, to reflect management's lower revenue guidance. "Profitability is the bright spot," says Kathy L. Huberty, Morgan Stanley's analyst who tracks SMART. "Despite the revenue miss, operating income came in 20% above our estimate due to strong gross margins and operating expense control," she says.

"We continue to believe in the long-term story of rising interactive whiteboard penetration in developed markets," says Hurberty, although U.S. budget pressure will likely remain an overhang on the stock.

"Buy the Pullback"

But based on customer surveys and industry checks, the company's long-term outlook remains strong, asserts Doug Reid, analyst at investment firm Stifel Nicolaus, who rates SMART a buy with a 12-month price target of $16.

The bottom line is that SMART is the dominant company in a relatively new tech sector, and the stumble in its stock price makes it one of the few undervalued tech plays. "Investors should buy the pullback," says Todd Coupland of Oppenheimer, who rates the stock as a "sector outperformer." His price target: $17. Pardon the pun, but SMART may now be one of the smartest tech plays around.
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