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CASHing In On The Tech Sector

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June 10, 2009 – Comments (6) | RELATED TICKERS: TSRI , CSPI , TTIL.DL

CASHing In On the Tech Sector

 

Over the last three to four days I’ve been perusing the technology sector looking for value plays. Although taking a value approach in the tech sector hasn’t been the best play over the long-term, I am thinking with the expectation of a sideways to down-trending market over the near-term, companies with high cash piles and low price to book valuations are going to attract outside investors.

 

Typically I would go right into the nitty-gritty of it, but the parameters I used were so far skewed toward micro-cap companies that I feel I should absolutely smother you in disclaimers first so you don’t trust my writing as the word of God and go out and purchase every single one of these stocks.

 

The main parameter used in this search was cash per share. I was merely looking for companies in the technology sector that were trading below their current cash value. In some cases this also meant taking into account all outstanding debts and subtracting that value from the current cash + investments on hand.

 

Micro-cap stocks are in nature risky! Flat out these companies usually have a stock price which teeters on being delisted day to day from the major exchanges on which they’re listed. Their revenues can be extremely erratic given that they typically have a relatively small customer base and profit history can equally be all over the place. Many of the companies on this list I have compiled do not have the management team, business plan, knowledge or customer base to get them to profitability and most will likely die within three to five years. There are however three gems on this list which I feel could shine in any market environment, and a handful of others that could also pull through with some nice gains.

 

What needs to be understood is that cash is no guarantor of future success. Cash is merely a means by which companies can attempt to maintain strong balance sheets. A strong cash position can mean higher profits in a rising interest rate environment (since money market and CDs yields are higher), and they can also mean a stronger chance of a buyout offer from a competitor. Strong cash positions are also looked upon to help determine whether or not a small cap can get the line of credit it needs to expand its business. However, cash means absolutely nothing if the company that holds it will never turn a profit!

 

The following parameters were used to form the list you see below you. I assumed the closing stock prices for all 38 of these companies of Monday, June 8th. I also took into consideration all current debt obligations and subtracted them from available cash so you can get a clearer picture of just how much tangible assets these companies have in relation to their current per share price. The percentage figure on the right hand side of the column signifies exactly how much each company would have to rise in order for them to be trading at par with their cash value and as you can see, some moves would be quite significant.

 

Tegal Corp. (TGAL):                              $1.51 in cash/ $1.50 price per share    0.67%

Real Networks (RNWK):                $2.80 in cash/ $2.77 price per share    1.08%

UTStarcom, Inc. (UTSI):             $2.35 in cash/ $2.32 price per share    1.29%

Performance Technologies (PTIX):       $2.90 in cash/ $2.78 price per share    4.32%

Comarco, Inc (CMRO):           $1.93 in cash/ $1.84 price per share    4.89%

Silicon Graphics Int’l (SGI):          $5.82 in cash/ $5.54 price per share    5.05%

TheStreet.com (TSCM):            $2.11 in cash/ $1.94 price per share    8.76%

CSP, Inc. (CSPI):              $4.00 in cash/ $3.60 price per share            11.11%

New Motion, Inc. (NWMO):        $1.04 in cash/ $0.93 price per share            11.83%

WebZen, Inc. (WZEN):        $4.58 in cash/ $4.01 price per share            14.21%

Nam Tai Electronics (NTE):       $4.92 in cash/ $4.30 price per share            14.42%

Adaptec, Inc. (ADPT):          $3.12 in cash/ $2.71 price per share            15.13%

TSR, Inc. (TSRI):         $2.05 in cash/ $1.76 price per share            16.47%

Ikanos Communications (IKAN):     $2.03 in cash/ $1.74 price per share             16.67%

Track Data Corp. (TRACD):     $4.20 in cash/ $3.62 price per share            17.13%

AuthenTec Inc. (AUTH):        $2.13 in cash/ $1.81 price per share             17.68%

Satyam Computer Services (SAY): $3.21 in cash/ $2.72 price per share            18.01%

Nyfix, Inc. (NYFX):          $1.01 in cash/ $0.85 price per share            18.82%

DataRam Inc. (DRAM):         $1.71 in cash/ $1.41 price per share            21.28%

I Go, Inc. (IGOI):        $0.92 in cash/ $0.75 price per share            22.67%

Market Leader, Inc. (LEDR):        $2.37 in cash/ $1.93 price per share            22.80%

Optibase, Ltd. (OBAS):       $1.74 in cash/ $1.40 price per share            24.29%

Dot Hill Systems (HILL):      $1.10 in cash/ $0.88 price per share            25.00%

LookSmart, Inc. (LOOK):       $1.67 in cash/ $1.33 price per share            25.56%

Axcelis Technologies (ACLS):      $0.69 in cash/ $0.50 price per share            27.78%

Autobytel, Inc. (ABTL):        $0.57 in cash/ $0.43 price per share            32.56%

Actions Semiconductor (ACTS):     $2.97 in cash/ $2.24 price per share            32.59%

Ditech Networks (DITC):        $1.65 in cash/ $1.24 price per share            35.25%

Westell Technologies (WSTL):     $0.67 in cash/ $0.49 price per share            36.73%

Convera Corp. (CNVR):       $0.42 in cash/ $0.30 price per share            40.00%

Soapstone Networks (SOAP):       $5.54 in cash/ $3.91 price per share             41.69%

Mattson Technology (MTSN):     $1.84 in cash/ $1.29 price per share            42.64%

Leadis Technology, Inc. (LDIS):      $0.84 in cash/ $0.57 price per share            47.37%

Trident Microsystems (TRID):      $3.22 in cash/ $2.05 price per share            57.07%

Vimicro International (VIMC):      $3.39 in cash/ $2.00 price per share            69.50%

Endwave Corp. (ENWV):       $4.34 in cash/ $2.45 price per share            77.14%

TTI Team Telecom (TTIL):      $1.56 in cash/ $0.83 price per share            87.95%

EDCI Holdings (EDCI):      $9.54 in cash/ $5.07 price per share            88.17%

 

Now as I mentioned before, a lot of the companies above will not survive the next five years. Some of them are facing countless lawsuits, some haven’t seen a profitable quarter in years (or ever!), and some like Soapstone Networks decided to change business models altogether! Needless to say, many of these companies are worthless despite their cash pile but a few here stand out as incredible values amidst a sea of eventual pink sheets.

 

I Go Inc. (IGOI) has to be one my favorites on the entire list, currently trading at about a 22% rise below their par cash value. IGOI is primarily engaged in the mobile peripherals business and is surprisingly profitable! I Go has produced a profit in three of the past four quarters while trumping the very few estimates out there by a penny or three each time. You’ve got a company here that is successfully cutting back on costs, turning a profit of 5-10 cents per year, and trading 17 cents per share below its cash value. Basically, I’m standing on the corner and handing over 75 cents for a dollar in a few months. IGOI has a shot at finishing the year with nearly $1 in cash per share and I would place their current fair market value at $1.55

 

CSP Inc. (CSPI) is another one that clearly looks to be in strong financial shape, especially after posting a profit in 2 of the past 3 years. In addition, CSP is off to a very strong start in 2009 with a 7M dollar increase in revenues and 18 cents per share of profits through the first six months. CSP did mention that they have somewhat limited visibility for the second half of the year and expects their margins and revenues to be affected by the economic slowdown. This to me is the only possible reason why CSP is currently trading below their cash value by roughly 11%. CSP currently resides in the very overcrowded systems integration sector, and is one of the few companies on this list that could be ripe for a takeover. CSP could, and should be trading somewhere in the neighborhood of $6.50 per share.

 

TTI Team Telecom International (TTIL) also works in the systems integration business but is focused solely on the telecommunications industry (bet you couldn’t tell that by their name). TTIL is turning the corner right now and is surprising a few people with decently strong results in relatively poor economic times. The only reason I’m not gung-ho on TTIL here is that the majority of their profits have come from cost-cutting and favorable currency exchange rates between the US dollar and Israeli Shekel. We’ve also seen revenues and near-term visibility dipping at TTIL, but even then, given their cash pile and the fact that they are trading at a staggering 87.95% below their par value, I don’t think it would be a long shot to expect TTIL to trade around $1.50 per share within six to twelve months (which by the way would STILL be below their current cash on hand).

 

Other names on this list that stood out as potential value candidates are….

 

Trident Microsystems (TRID), which I have already done a write-up on and can be found here: http://caps.fool.com/Blogs/ViewPost.aspx?bpid=191545&t=01002756778892789413

 

Satyam Computer Services (SAY) saw a huge run-up today of over 30% if I recall correctly, but could be in for much more. The big problem with Satyam was their corrupt accounting scandal a few months back. I think when we get a clearer picture of how much money this company really has and what sort of profits they’ll be generating, then I can give it a full-on recommendation, until then, we’ll put this in the maybe pile.

 

TSR Inc. (TSRI) is involved in the computer programming and consultation field and does one thing very well; turn a profit! TSRI would easily have made my top three if they hadn’t seen such a weak beginning to 2009. TSRI has seen very small but incremental rises in their revenue in the past 3 years but I expect that to end in 2009. They do however continue to produce profits thanks in part to very solid cost-cutting measures. TSR makes for a bargain under their cash value for sure, but given how few shares trade I just don’t foresee the stock moving enough to make it into my top 3. Still, a 30% gain from current levels seems in order over the remainder of 2009.

 

There are a few other companies on this list that aren’t going to fail, but they don’t interest me in the least either. Needless to say, cash is king but those companies that have cash are really slim pickings based on what I’ve researched above.

 UltraLong

6 Comments – Post Your Own

#1) On June 10, 2009 at 1:22 AM, kaskoosek (37.62) wrote:

Ultralong

 

Very good post thanks, though I do not feel like investing in micro.

 

There are going to be some severe shocks to the system. I do not find that these sectors price these risks.

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#2) On June 10, 2009 at 2:09 AM, JakilaTheHun (99.93) wrote:

Great write-up!

I'll have to take a look at some of your recommendations.  The only ones I've examined in the past are Trident (TRID) and Satyam (SAY).

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#3) On June 10, 2009 at 2:15 AM, djkumquat (48.59) wrote:

thanks for the research! will do some further digging. what do you think of NTE?

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#4) On June 10, 2009 at 2:22 AM, TMFUltraLong (99.95) wrote:

The reason I left Nam Tai off of my list was years of declining revenues and declining profit margins. Im sure Nam Tai will survive and eventually could return to profitability, but unfortunately with so few short shares there isnt any near-term catalyst which will drive the stock higher. A short covering rally is the only catalyst I keep seeing in this market right now and you simply won't get it here. I could foresee NTE trading sideways between $4.00 and $6.25 for sometime over the next year.

UltraLong

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#5) On June 10, 2009 at 2:24 AM, Tastylunch (29.50) wrote:

TSRI is an old everydayinvestor fave

 I did a writeup on them here if you are interested. They lost a couple big contacts that could hurt their profitbaility.

http://boards.fool.com/Message.asp?mid=27245147&sort=whole&terms=TSRI&vstest=search_042607_linkdefault

Great post deep value plays are fun and tech is great place to look.

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#6) On June 10, 2009 at 4:34 PM, FleaBagger (28.19) wrote:

TSRI would easily have made my top three if they hadn’t seen such a weak beginning to 2009.

Your #1 (IGOI) had a weak beginning to 2009. In fact, it was terrible. I'm just going by the numbers, but you haven't provided much detail, either, so let me just dive in:

Revenue dropped more than 25% from the same quarter of the previous year, and more than 30% sequentially.

Earnings are even worse, with a loss of over $1M for the quarter alone, quadrupling the loss of the same quarter last year, and coming sequentially off a profitable quarter of $100k. The most recent quarter's loss is more than twice the profit of the previous year, i.e. four quarters combined.

By pulling some money out of investments, they manage to rescue the cash flow picture, selling $2.7M in investments to overshadow the negative $1.3M in operating cash flow, for free cash flow of just over $1.3M. This is down from almost $4.9M in the same quarter last year, and $10M for the whole previous year, including $5.5M of positive operating cash flow.

Unless you have some context to explain why IGOI's next few quarters will be better than their most recent one, frankly, I'm not impressed. This reminds me of when, as a much younger investor, I was impressed with RWC's numbers, until revenue started dropping, and I learned a lesson: never invest in a micro-cap with declining revenue. A micro-cap just doesn't have enough costs to cut to make it worth it.

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