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TMFMmbop (37.71)

ALDN Down 5%

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January 22, 2007 – Comments (2)

Interesting day today re: ALDN. The stock is down 5% as I write even though Q4 and 2006 results exceeded analyst (and my) expectations.

But, ahem, this is a pessimistic market, and ALDN is getting punished for issuing disappointing guidance.

Let's take a closer look, shall we?

According to the company, 2007 revenue is going to be in the $95 million to $102 million range. That's a $7 million difference. Not bad. What's $7 million between friends (and investors)?

Actually, a heckuva lot. Regarding yoy growth, $95 million in revenue next year would mean 7% top line growth. $102 million would mean 15% percentage growth. That eight percentage points is huge, particularly when it comes to the valuation of this tiny stock.

For comparison, it'd be like a meteorologist telling me on the radio this morning that it will be between 20 and 80 degrees fahrenheit today.

So, the stock is selling down, and I (who own shares) am revisiting my model. Here's what I found. If we plug in 7% revenue growth next year and for a few years after that, and then have that number decline to a terminal growth rate of 2%, ALDN stock is worth a little less than $17 per stub. If we plug in 8% next year and the year after and 7% for the years after that and 2% terminal, then we get about $17.50, or where the stock has traded down to today.

In other words, the market has sold down ALDN to the very low end of its guidance. (And that makes sense. According to Thomson, analysts are expecting $96 million in revenue next year, or an 8% increase.)

Now let's plug in that 15% number. If we assume 15% for next year and then degrade it over time, this is a $22 stock. In other words, if ALDN had said today that they were guiding only to $102 million in revenue, then I think we would have seen shares jump 8% to 10%. It also looks like they're plugging in gross margins of 76% to 78%, which is also at the low end of what's probable.

But this is a pessimistic market, and it always pays to be conservative.

Anyhow, that's my updated valuation range for ALDN: $17 to $22. To be safe, don't start buying until below $17 (it was $14 when we first highlighted this company for Tiny Gems). But given the fourth quarter results, the current sell-off, ALDN's international niche, and the growing demand for computer security products, I think ALDN could very well do better than analyst expectations. Meanwhile, the company continues to add to its pile of cash.

FWIW, and Fool on,

Tim

2 Comments – Post Your Own

#1) On January 23, 2007 at 2:10 PM, Steve819 (96.21) wrote:

I like this company too Tim as you know. However, I am concerned a bit about management - if I recall, quite a few high level people left the company, and the sales force was retooled. It's cheap, but with good reason methinks. Still, with a CAPS holding period of forever, why not?

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#2) On January 23, 2007 at 3:07 PM, TMFMmbop (37.71) wrote:

Hey, Steve.

The only senior person to leave was CFO Markov, and as far as I can tell, that was not for any tawdry reasons. Moreover, founder/CEO Margalit continues to hold a significant number of shares.

Obviously, the sales force is a huge part of success here. The "salesforce initiative," as the company calls it, was one of the reasons SG&A expenses were up recently and margins down. Again, one of those reasons why the market has valued this stock at the low end of the guidance.

But the sales/marketing initiative is meant to realign the company to give them broader access to emerging markets while maintaining control under one VP. From an efficiency standpoint, I think this is sound from a company with such geographically diverse revenues.

The sales force is crucial to the succcess of a company like this, so I'm not too worried about the investment.

For a similar situation, check out either HSTM or NRCI. NRCI's growth has stagnated as they try to incorporate new sales force that was the result of an acquisiton. I think they can. HSTM tried a few new sales initiatives, failed, and got crushed. But this stock, IMO, is a great buy below $3.25.

I own shares, so I have a little more in the game than CAPS. That said, no stock gets cheap without reason. For one, I know I'll get burned if they do nothing with the cash they're accumulating.

tim

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