For Subscribers

Get the complete article now!

Leading analyst examines the technology sector in this special Imaging Technology Stocks report from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info402.htm

TWST: Is that really where the growth is going to be in the imaging market?

Mr. Rosenzweig: In the imaging sector, companies are often beset with legacy technology. Investors looking for pure plays on the key growth themes and transition to digital will inevitably turn to the software side. Those companies offer the potential for substantial revenue gains long term, very high margins, highly attractive balance sheets and solid cash flow. Like everyone else, they’ve been hit hard by the downturn in the global economy, but Adobe in particular should generate significant operating leverage as the environment rebounds. When people think of digital imaging, there’s a tendency to focus on capture devices — specifically, digital cameras. But most of the companies participating in that area also have exposure to legacy technologies such as film. Film, we believe, is on the brink of secular decline in developed markets, beginning sometime within the next few years. Another way to play digital cameras is through the Flash media players but Flash memory has faced significant oversupply and commodity-pricing issues. There are more direct ways to play the transition to digital and color technologies in the office equipment world. Electronics for Imaging (Nasdaq:EFII) is a pure play providing a large percentage of the controllers used to drive color copiers and color laser printers, as well as black and white digital copiers. These are all solid growth areas. The company boasts strong margins, a solid balance sheet, and good cash flow. Right now, EFI is benefiting from a major product cycle, with Ricoh, Canon (NYSE:CAJ), Xerox (NYSE:XRX) and Minolta all introducing key new mid-range and high-end products. That said, investors have to be mindful of the company’s heavy exposure to a few key (original equipment manufacturers) OEMs and their inventory cycles.

TWST: And who looks like the winner there — or is it too early to say?

Mr. Rosenzweig: While it is still early to tell, there are clearly distinctions between copier and printer vendors. We talked about Electronics for Imaging earlier. They are a great way to play the growth themes in the transition to color and digital in a vendor neutral way. EFI should be a winner in the office equipment world of the future, especially as mid-range color solutions become more accepted in the office. It’s harder for EFI to add as much value on lower-end devices.

TWST: Why the drop in images?

Mr. Rosenzweig: Roughly 57% of images that are taken digitally tend to get saved, and just 20% or 30% of the images that are saved actually get printed. The question is why aren’t people printing the images. First, when people receive a photo via e-mail, there seems to be a natural inclination not to print it — there’s just not the desire. A study from Dataquest suggests that 50% of people who have received photos via e-mail have never printed one. On the other hand, if you take the image yourself on a digital camera, what’s the desire? There seems to be a greater demand to print personal memories. That being said, the technology has been lacking in terms of ease of use. The high cost of digital media also has precluded as rapid an adoption of digital output as we’d like to see. Printing images at a kiosk or on a home inkjet printer tends to be time-consuming as well. Traditional processing tends to be much simpler. People find that it’s easier to drop off a roll of film than it is to download their pictures at home and print them out.

This special issue includes:

1) Imaging Technology Stocks - In an in-depth (3,900 words) Analyst Interview, Jonathan Rosenzweig, Managing Director and Equity Analyst with Salomon Smith Barney in the Equity Research Department, examines the outlook for the sector and shares specific stock recommendations.