Something has to happen with Swedish biometrics company Fingerprint Cards. Its share price has more than halved over the last 12 months, and the company is under massive attack from short-sellers.
Right now, almost 16% of the shares outstanding are shorted, with Coatue, Melvin Capital and Cadian Capital being the biggest shorters.
Operationally, things are going great for the company. Its recently published year-end results for 2016 showed an increase in revenues of almost 130% to SEK 6,6bn. EPS increased by 155% to SEK 6,33. For 2017, analysts expect Fingerprint to report sales of 7,7 bn and an EPS of 6,56, which implies a current p/e-ratio of 7.
So far, there have not been any direct attacks by shorties in terms of accusations of wrong-doing, as many times seen in the US (Muddy Waters etc). Critics fear that the company, which boasts a market share of 55-60 % of the global market for fingerprint sensors for smartphones (excluding Apple), will be taken over competition like the Chinese company Goodix, and that margins will come under pressure as competition intensifies.
There is no evidence of any of these developments taking place. While competition is naturally increasing, Fingerprint recently had a very successful week at the Mobile World Congress in Barcelona, where 11 new smartphone models were launched (Huawei, LG, Sony etc), all containing sensors from Fingerprint.
Weak corporate governance
The company and its representatives have not addressed the issue of the falling share price at all, revealing one of the biggest problems Fingerprint is facing. Its Board is simply not up for the task of governing a global market leader, listed on the stock exchange. Unfortunately, institutional ownership is not a satisfying level either, making Sunfloro the biggest owner with 15,9% of the votes (1,85% of share capital). Sunfloro is 100% controlled by former Fingerprint CEO and board member Johan Carlström, who himself is involved in several insider trading investigations.
Acquisition of Delta ID & Dividend
Fingerprint’s financial position is very strong and at the end of 2016 had a net cash position of SEK 1,2bn. Rightly so, the company has decided to put this money into action and has recently acquired iris recognition specialist Delta ID. Also, the Board has proposed a dividend of SEK 2 per share for 2016, corresponding to a current dividend yield of 4%. Surprisingly, shorts have continued to add to their positions following these announcements.
The company needs to be put up for sale
The Board of Directors is there to protect the interests of the owners, i.e. the shareholders. Obviously, development over the last months are hurting shareholders tremendously, as well as the company´s reputation. One way to tackle the issue is to trust that things will sort out by themselves, sometime in the future. If Fingerprint will continue to perform, its earnings will continue to grow and one day the shorts might move to their next victim. However, a company’s valuation can be damaged for a long time.
With no end of the current share price slump in sight, we believe the company needs to be put up for sale. There are many examples from the US, where either activist investors or the Board have taken an aggressive stance towards exploring a potential sale of a company:
Here are a few examples:
- WebMD – Company has started to look into “strategic alternatives” http://www.marketwatch.com/story/webmd-stock-halted-company-may-sell-itself-2017-02-16
- Dell – Special committee defends sale of company http://www.reuters.com/article/us-dell-specialcommittee-idUSBRE9250MU20130306?feedType=RSS&feedName=businessNews&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+reuters%2FbusinessNews+%28Business+News%29&utm_content=Google+International
- Pandora – hedge fund Corvex Management takes stake to push for sale https://www.forbes.com/sites/maggiemcgrath/2016/05/17/activist-investor-implores-pandora-to-consider-putting-itself-up-for-sale/#5c938dc853bb
- Hershey Foods – Considering a plan to put itself up for sale https://www.wsj.com/articles/SB1027561165960914640
Where´s Fingerprint’s special committee? I want to see Fingerprint hiring an investment bank that “explores strategic alternatives”. It is actually the duty of the Board to do this.