20-20 Technologies: More than just a fixer-upper
If you’ve ever undertaken or even just considered fixing up your kitchen, there’s a good chance you’ve used the products of 20-20 Technologies Inc. (TSE: TWT). The first step in the process is usually looking at various layouts and plans using a computer. And these days, everybody from custom home design companies to large-scale supply chains does just that using 20-20 Technologies’ products.
Based in Laval, Quebec, 20-20 has a long track record of strong sales and handsome margins. Typical was 2006, when the company’s gross margin was 75.7% on revenues of C$60.4 million.
Much of that revenue comes from dealers and retailers who pay anywhere from US$1,000 to $15,000 per seat for 20-20’s design software, which allows the user to choose from different appliances, cabinets, and furniture, and plan and visualize the interior of residential or commercial spaces.
The company’s software can ensure that a kitchen design meets specific rules and regulations, and will produce realistic 3D representations of the final design. It can generate a list of components including pricing and availability, and even submit purchase orders to the various component makers. The software greatly reduces design and ordering errors, and also helps close sales, since customers are much more willing to make a purchase when they can visualize the final outcome.
20-20 also creates and maintains electronic catalogues for product manufacturers. The company charges anywhere from around US$30,000 to upwards of US$100,000 to develop an electronic catalogue.
The company boasts a dominant market position, with its software found in most outlets of The Home Depot, Inc. (NYSE: HD), British home improvement retailer B&Q, and Lowe’s Companies, Inc. (NYSE: LOW). In addition, retailers often offer a "light" version of the program on their websites.
What’s more, each of 20-20’s two main products reinforces the other’s success. The more retailers that use the design software, the greater the benefit for product manufacturers to partner with 20-20 when it comes to designing an electronic catalogue. And the larger the number of catalogues in 20-20’s database, the more attractive its design software becomes.
Another plus is that 20-20’s customers have invested substantially in license fees, and have also put money into training employees on how to use the system, making it unlikely they can be convinced to switch to a competitor’s products. As Blackmont Capital analyst Lawrence Rhea puts it, “...20-20 has created a high barrier to entry in establishing its large network of manufacturing, retail/office, and dealer customers over the past 20 years.”
With the housing market slowing, 20-20 may face a decline in sales of its retail offerings. But up to now it has been highly focused on this niche, meaning it has ample room to grow elsewhere. For commercial design, 20-20 offers several different products that can be used to lay out desks, cubicles, and workstations. “Growth appears to be picking up in 20-20’s commercial and manufacturing business as it starts to leverage cross-selling opportunities across its acquired customers,” notes BMO Capital markets analyst Thanos Moschopoulos.
The company also has plenty of opportunities to expand geographically, notably in Europe, where the competitive environment remains fragmented. In the 2007 second quarter, European sales grew by 20% organically, and now account for 31% of revenues. Indeed, 20-20 could either take away customers from its major competitor, Planit Holdings PLC, or possibly acquire the Planit Fusion design business, which TD Newcrest analyst Scott Penner says could be “...a fantastically accretive deal... .”
Recently, 20-20 put on its usual full-court press at K/BIS 2007, the largest kitchen and bath trade show in the world. With more than 40,000 national and international industry participants, and almost 1,000 bath and kitchen companies, it’s a major revenue-maker for the company. Underscoring its integration in the industry, 20-20 software was used to market products by many of the companies in attendance.
Despite all this success, investors have remained surprisingly disinterested. While this may in part stem from the illiquidity of its shares, analysts say this spells opportunity, given the company’s ability to grow by 10% or more organically, as well as expand its margins.
Recently, 20-20 has been trading at 18x forward EPS estimates. EPS for 2006 was $0.30, and for the second quarter of 2007 was $0.09. While that was flat year-over-year, 20-20 recognized an unrealized $0.5 million foreign exchange loss during the quarter. “Excluding the F/X loss, 2020 generated an adjusted EPS of $0.11, well ahead of our estimate and consensus” noted Blackmont Capital in a June 13, 2007, note. The brokerage has an $8.50 target and a buy recommendation, noting the company trades at a significant discount to its comparables.
BMO Capital Markets has a lower target of $7.50, using a P/E of 15X applied to its fiscal 2008 EPS estimate of US$0.47. BMO notes it would be more positive on the 20-20 story if it weren't for its concerns over the effects of a slowdown in the U.S. residential market.
Noting that it saw nothing at K/BIS 2007 to change its view that 20-20 “has one of the strongest competitive position in its coverage universe,” TD Newcrest maintained its buy recommendation and C$8.50 target. 20-20 closed Wednesday at C$7.00. The 52-week range is C$4.66 to C$7.75.
