X-Rite Remains a Colorful Buy

The investment thesis at X-Rite (XRIT - commentary - Cramer's Take) is progressing well and looks like a good bet to continue doing so. That thesis: As X-Rite continues to integrate last year's large acquisition of Amazyz, cost-saving synergies should propel growth in cash flow and EPS far above the moderate revenue growth expected for the combined entities.

X-Rite is in the business of color management. This may seem like an abstract niche, but it is a much-needed technology for many industrial, retail, graphic and printing applications. The trend toward digital printing only highlights the importance of X-rite's capabilities.

Measuring Progress

X-Rite has released two quarters of results since I recommended its stock in my Nov. 13, 2006, column, and XRIT is up a very respectable 23% since then -- even after coming down with the indices this week. It may be boring to say that all is going as planned with this investment thesis, but this is the sort of predictability I can get used to.

To be sure, top-line growth at the still-combining X-Rite/Amazyz is admittedly sleepy. First-quarter revenue increased just 6.3% year over year, to $57.7 million. Modest sales growth was expected, however, and this growth metric is actually above the 4%-to-6% range that management was guiding for late last year.

The more interesting growth story is happening beneath the revenue line. Non-GAAP operating earnings were 11 cents per share in the first quarter. That compared very well with the 2 cents per share in comparable earnings a year ago. EBITDA for the quarter jumped likewise to $12.2 million -- equal to 21% of revenue.

X-Rite's cost-savings synergies are not completed yet, so neither is near-term growth in cash flow. After squeezing $5.3 million in combined costs out of the first quarter, management expects to realize another $15 million or so in savings over the coming three quarters. EPS estimates have been raised (again) as a result of the first-quarter numbers, and full-year expectations center around 60 cents. For 2008, EPS of 95 cents to $1.00 is forecast.

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At the time of publication, Moreland was long X-Rite, although holdings can change at any time.

Jonathan Moreland is director of research and publisher of the weekly publication InsiderInsights, founder of the Web site InsiderInsights.com and the director of research at Insider Asset Management LLC. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, Moreland appreciates your feedback; click here to send him an email.