Should You Sell This Stock After Recent Insider Sales?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Recently, Vincent Pilette, the Chief Financial Officer of Electronics for Imaging (NASDAQ: EFII) (EFI), sold as many as 40,000 shares of the company at an average price of $26.20 per share, with a total transaction value of more than $1 million. In the past twelve months, shareholders of the company must have been quite happy because of a consistent rise in its stock price, from more than $14.30 per share to nearly $27 per share.

Thus, EFI’s CFO sold his shares near its 52-week high. Should investors turn bearish on the recent insider sales? Let’s find out.

Business snapshot

EFI is a leading customer-centric digital printing innovation company, providing industrial super-wide and wide format, label and packaging, print production workflow, cross-media marketing, and web-to-print to its customers. EFI operates in three main business segments: Industrial Inkjet, Productivity Software, and Fiery.

The majority of its revenue, $320.2 million, or 49.1% of total 2012 revenue, was generated from the Industrial Inkjet segment. The Fiery segment ranked second with $228.4 million in revenue while Productivity Software contributed more than $103 million in sales in 2012.

Great growth in the past three years but expensive valuation

Since 2010, EFI has experienced great growth in both its top and bottom lines. Revenue increased from $504 million to $652 million while net income rose from $7 million to $83 million during the same period. In 2012, EFI generated $53 million in operating cash flow and $47 million in free cash flow.

What I like about EFI is its strong balance sheet. As of December 2012, it had $651 million in total stockholders’ equity, $365 million in cash and short-term investments, and no debt at all. However, as the company has been growing partially via acquisitions, it recorded goodwill of nearly $220 million.

Interestingly, over the past five years, EFI has spent around $186 million to buy back its shares. At $27 per share, EFI is worth more than $1.3 billion. The market doesn’t seem to value EFI cheaply at 12.64 times EV/EBITDA.

Ricoh tries to improve customers' experience

Compared to its bigger peers Ricoh (NASDAQOTCBB: RICOY) and Xerox (NYSE: XRX), EFI is quite expensively valued. Ricoh is a Japanese company providing office automation equipment in more than 200 countries around the world. The company operates in three main business segments: Imaging and Solutions, Industrial Products, and Other.

At the beginning of 2013, the company announced that it has merged its two divisions and their product portfolios, including business-to-business camera and lens product lines to improve customers’ experience. The Vice President of Visual Communications Group of Ricoh Americas Corporation commented on the move: “Businesses and government organizations that invest in our products deserve a completely satisfying sales, service and support experience. This integration ensures they have that experience while enabling us to more efficiently focus our R&D effort on the innovations that are most important to our customers.”

Ricoh is trading at around $56 per share, with a total market cap of more than $8.1 billion. The market values Ricoh quite cheaply at only around 7 times EV/EBITDA. However, Ricoh has sluggish profitability, with only 5.5% in operating margin and 3.5% return on equity.

Xerox - strengthening its leadership in printing and shifting to services

Xerox has the cheapest valuation. It is trading at around $9 per share with a total market cap of $10.6 billion. The market values Xerox at only 6 times EV/EBITDA. Xerox is the provider of business process and information technology outsourcing support and other solutions.

In February, Xerox acquired France-based Impika, strengthening its global leading position in digital color production printing. Impika is the provider of aqueous inkjet pressed products including iPrint, with the printing speed of 375 meters per minute, and I Press, the graphic communications digital press with 2400x1200 dpi resolution. Although Xerox is still expanding its footprint in printing technology, the company is also in the process of shifting its focus to services.

Xerox intends to commit as much as $500 million for acquisitions in the service industry in 2013. Furthermore, the company plans to spend $300 million to pay dividends, $400 million for share repurchases, and an equal amount to pay down its debt.

In the past twelve months, Xerox generated the highest operating margin of the trio at 7.6%. However, its return on equity at 10% is less than the 13.7% return on equity of EFI. Among the three, Ricoh pays the juiciest dividend yield at 5.3%. Xerox ranked second with a 2.7% dividend yield while EFI does not pay a dividend.

My Foolish take

With no dividend payment, a very high valuation, and insider selling, I personally would not like to buy EFI at its current trading price. Xerox and Ricoh seem to be much better picks with decent dividend yields and a much cheaper valuation.

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Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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