Avigilon Fights Back Against Falling Share Price With Share Buyback

Author: John Honovich, Published on May 08, 2015

Avigilon's stock is down 50% from their peak price last year.

The stock price is also significantly below the levels when Avigilon raised an additional $169 million from investors in the past 2 years.

Now, Avigilon is gearing up to buy back stock at the much lower price levels. In this note, we look at the plan and how it might help Avigilon.

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Comments (7)

...Avigilon has more than enough cash and credit available to easily cover the move.

Buying back stock with borrowed money boosts earnings per share but reduces total earnings. It only hurts the company operationally.

"It only hurts the company operationally."

Why? How much? Relative to doing nothing with the stock?

Minimally, there's some value in the press release, even if they buy nothing because it forces short-sellers to factor in what Avigilon could do.

Additionally, it should buy them some time to boost the stock until the next quarterly results 3 months from now, when hopefully they can deliver much better results and get a natural rally.

Why does it hurt operationally?

Interest expense

4,000,000 shares @ $17 = $68,000,000 = ~$2,000,000/year interest. That's > 10% of 2014 earnings.

Increased Risk of default / Liquidity Crisis

If Avigilon growth/revenue/share price stagnates, they run the risk of defaulting on the loan or at least expensive emergency stopgap loans.

What does it help operationally?

Are potential customers making decisions based on the share price of Avigilon?

Are dealers dropping out because of the share price?

I'm assuming they are planning to retire enough stock to have a material effect. To the degree that they are just filing for the bounce and a token buy then of course the downside is less.

Paying cash for the shares is essentially saying, "The best way we can create investor value with our available capital is not to invest more in R&D or Sales and Marketing, but rather to speculate, right alongside our investor, on what our future performance will be."

And if there is no better use for the money, ok.

But borrowing to gamble is another thing altogether.

You are assuming they buy the full 10% (technically even slightly more).

From what I can tell the 10% is just boilerplate and not likely they are going to do that.

The big thing is whether the stock goes up. If they buy stock and it helps it go up, they win. Indeed, they can later go back and issue new shares at a higher price and 'make money'.

As for your operational question, this is hurting them operationally. Just like the rocketing stock price was great for morale, a falling one is bad. It's also bad for stock options and employees who have shares.

Surely, Avigilon's competitors are going to use this turmoil against them, to seed doubts in the minds of dealers and prospects.

And maybe most importantly, this has to put a lot of stress of the triumvirate, and as the employee reviews show, they are not gentle in the best of times...

If memory serves it was right around this time last year when CEO Fernandez declared the stock undervalued at $20 a share, and proceeded to purchase $1,000,000 (that's one meehlion dollars) on the open market to bolster investor confidence.

How did that work out?

This time he's gambling with everyone's money, not just his.

i know it's naive but why don't they just take whatever hit they have to in share price, deal with it, and concentrate on their core business of making cameras and stuff like that?

They make good product, they make decent margin, they have loyal dealers. They need to concentrate their business, not be an investment bank.

"This time he's gambling with everyone's money, not just his."

It remains to be seen how much money he's 'gambling'. Right now, it was the ~$500 to send out a release on the wire. The stock was up 5% today, or $40 million gained.

And, yes, I am simplifying. It could turn out to be a bad strategy if they buy a lot of shares and the stock continues to go down. But it's a decent press release / option to initiate that might help some.

Here is an interesting paragraph:

In accordance with TSX rules, daily purchases made by Avigilon under the Bid will not exceed 66,726 Shares, subject to certain prescribed exemptions, which is equal to 25% of Avigilon's average daily trading volume on the TSX for the six calendar months ended April 30, 2015 which was 266,905 Shares.

So maybe the idea is to just buy back the stock once in a while, but buy the full daily limit of 66,726 shares when doing so. And thereby limit the total capital at risk.

A 25% additional demand for shares will create an imbalance that is sure to have a noticeable impact on the price for that day. So maybe just use it tactically when the stock is having a rough day.

Though they can't always do this; Avigilon can only buy on a whim when not in possession of undisclosed information. Still maybe that's how they plan to use it when they can.

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