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Polycom's Reduction in Work Force: George Soros Searching for Better Profit Margin
Posted by: Victor Selva (IP Logged)
Date: February 4, 2014 04:47PM
On Feb. 3, the billionaire investor George Soros (Trades, Portfolio) bought Polycom Inc. (PLCM) at an average price of $11.72 and currently holds 9,400,708 shares of the stock. This trade makes me feel that he is betting in favor of the communications equipment sub-industry. So let's take a look at this company and try to explain to investors the reasons this is an apparently appealing investment opportunity in an industry that is becoming concentrated and globalized, dominated by large players like Cisco Systems (CSCO) and Qualcomm (QCOM).
Announcing Reductions in Workforce
Polycom provides standards-based unified communications and collaboration (UC&C) solutions for voice and video collaboration. The company has three products and solutions categorized as follows: UC Platform, UC Group Systems and UC Personal Devices.
The firm announced two plans in order to optimize the organization. The first one, revealed last year, targeted a 4% work force reduction as well as a reduction in leased facilities. The second plan, announced last month, is another 6% work force reduction. The company will also look to reduce the amount of leased office space.
"While these are very difficult decisions to make, they are necessary to better align expenses to revenue, and to reallocate cost towards those areas with better returns," CEO Peter Leav said.
Several tech vendors like Intel (INTC), IBM (IBM), Texas Instruments (TXN) and Hewlett-Packard (HPQ) have announced job cuts for 2014. These reductions will take effect in the near future while management will continue to explore additional opportunities to improve profitability.
In terms of valuation, it is not possible to value the stock on a P/E basis because of negative earnings. To use another metric, its price-to-book ratio of 1.4 indicates a discount versus the industry average of 1.87 and the price-to-sales ratio of 1.48 is above the industry average of 1.22.
Earnings per share (EPS) have experienced an improvement in the most recent quarter compared to the same quarter a year ago (-0.01 versus -0.20). Also, they have demonstrated a downward trend over the past two years which is a bad signal. We include in the next graph the stock price because EPS often lead the stock price movement.
As we can see, compared to where it was 12 months ago, the stock is up, but it underperformed the S&P 500.
Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of strength and is currently at 0.7%, far below the communication equipment industry median of 5.60%.
Although EPS in the most recent quarter are negative, the improvement suggests that the performance of the business is improving.
For a long-term perspective, I would advise fundamental investors to consider adding Polycom to their portfolios as its plans to lower costs (via work force reduction and other) that will stabilize revenue and sustain earnings growth in the future.
Hedge fund managers have also been active in the company. Gurus like Joel Greenblatt (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Leon Cooperman (Trades, Portfolio) and the fund Manning & Napier Advisors have invested in it.
Disclosure: Victor Selva holds no position in any stocks mentioned.
Guru Discussed: George Soros: Current Portfolio, Stock Picks
Stocks Discussed: PLCM, CSCO, QCOM, INTC, TXN, IBM, HPQ,