Why Intergraph Has an Edge


By Gene Marcial What does Intergraph (INGR) have that other technology companies don't? It certainly hasn't been acting like other tech stocks and has avoided the tech-wreck route. Unlike most other tech stocks, which have been clobbered during the past year, Intergraph shares have been shooting up -- from $5 a share in late December 2000, to more than $13 on Jul. 24, 2001.

A worldwide provider of technical software solutions and systems integration to various government entities, corporate, and industrial customers, Intergraph has attracted renewed investor attention of late for two reasons. The first: The company is turning around after four straight years of being deeply in the red.

This year, the company is expected to be in the black: "We expect Intergraph will post earnings of 45 cents a share on estimated sales of $750 million in 2001," says Stuart Rudick, of Rudick Asset Management in Mill Valley, Calif., who has been building up a stake in Intergraph.

INTEL CASE. The second reason behind the stock's hot streak: Intergraph's patent-infringement suit against Intel, which has been languishing in the courts for nearly five years, is now stirring speculation that Intel, the world's largest manufacturer of microprocessors, may finally decide on an out-of-court settlement.

For this reason alone, Intergraph "is worth a closer look," even though its stocks has already driven up so much, says Fredrik Tjernstrom of Hidden Asset Report, who notes that the lawsuit has cost Intergraph hundreds of millions of dollars in lost revenues and hefty legal bills. Should Intel finally settle, as he expects, "Intergraph could see a huge infusion of cash."

Tjernstrom notes that the U.S. Court of Appeals in April ruled against Intel, stating that the company doesn't have the right to use Intergraph's patented Clipper technology in Intel's Pentium chips. The court ruled that Intergraph had full and exclusive rights to its Clipper patent. At one time, the two companies had an agreement for

Intergraph to use Intel's chips in computer workstations. The partnership, which started in 1993, collapsed when Intergraph claimed that Intel was infringing on its chip-design patents.

FROM ALLIES TO ADVERSARIES. In 1997, Intergraph sued Intel, accusing the giant chip maker of trying to force it to share its patented technology. Intel had argued that it had rights to the technology under a 1976 technology-sharing pact it had signed with National Semiconductor (NSM), which had sold the chip technology to Intergraph as part of Intel's 1987 purchase of Fairchild Semiconductor Corp.

Bruce S. Seltzer, president of BSS Associates, a San Francisco investment advisory firm, figures that a settlement could range from $250 million to $2 billion in licensing royalties for Intergraph. If Intel allows the lawsuit to go to a jury trial -- in Birmingham, Ala., where Intergraph is headquartered, and where the lawsuit was filed -- a victory for Intergraph could result in an award for royalties and damages of $1 billion to $2 billion, based on Intergraph's claims, argues Seltzer. He calculates that, based on the company's shares outstanding of 50 million shares, an award of $1 billion would amount to an incremental $20 a share (pretax) for Intergraph.

Based on fundamentals alone -- without taking the Intel case into account -- Intergraph is worth around $20 a share, figures Seltzer. That estimate is based, he says, on 20 times his 2002 estimated earnings of about $1.10 a share -- up from estimated earnings in 2001 of 48 cents a share. For 2003, Seltzer expects Intergraph to earn $1.50 a share.

HOME COURT ADVANTAGE? While the company has provided little guidance on earnings, its business has been showing "very positive signs," says Seltzer. Intergraph develops and support software and services for government agencies and such industries as power utilities and communications. So Intergraph could be a big winner based on fundamentals alone, says Seltzer.

As to the court case against Intel, "the clock is ticking -- towards a jury trial in Alabama," where Seltzer says he doubts that Intel could win. "So it is very likely that Intel will agree to an out-of-court settlement with Intergraph," he adds, "in order to avoid what could be a costlier result all around."

Intel spokesman Chuck Molly wouldn't comment specifically on whether or not Intel would pursue a settlement deal with Intergraph. However, he reiterates that, as in past cases, "Intel historically has found ways to reach settlements." In that sense, he adds, Intel wouldn't rule out the possibility of settling the case out of court. In the meantime, however, "there has been no change in the litigation," he adds. "We are awaiting the trial date -- and we haven't filed an appeal" to the Appeals Court ruling. Marcial is BusinessWeek's Inside Wall Street columnist


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