Datawatch: A Microcap Value Stock

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 |  Includes: DWCH, PVSW
by: John DiStanislao

Datawatch (NASDAQ:DWCH) is a microcap stock ($7.10 million market cap) that provides business intelligence software solutions for the desktop and enterprise. More than 20,000 companies and government agencies worldwide, including most of the Fortune 100, benefit from their various software solutions.

The firm is best recognized for Monarch software, which has sold in excess of 400,000 registered copies. Their software is available in multiple languages including German, French, and Spanish. At this time, approximately 38% of the company’s revenues are derived overseas.

Over the past few years, the company has reinvested with the support of their solid cash flow to expand and strengthen their existing presence in other higher ticket enterprise data analytic solutions. The company has already completed a successful strategic shift to focus on more profitable enterprise solutions using their internationally popular Monarch technology as the engine.

Per Share Data

Price = $1.20
Cash = $.83
Total Liabilities= $1.38
Revenue = $4.16
Operating Income = $.18
Gross Profit = $3.02
CFFO(12months) = $.50
FCF(12 months) = $.46

Ratios

P/S = .30
The P/S ratio is selling at a discount compared to prior years
OI/EV = .10
EBITDA/MC = 19.21%
CFFO/NI = 2.35
EV/NI = 15.39
P/NI=10
FCF/MC = 22.14%
CFFO/MC = 25.90%

Comparable Company Valuations

Several years ago, the only comparable product that has most directly competed with DWCH’s Monarch software was from a company called Data Junction. Data Junction sold Cambio to replicate some of the functionality of Monarch to mine data from disparate text data sources. To make a long story short, Monarch is far more capable, popular and functionally rich with the ability to mine data from PDF, XPS, HTML, MDB, XLS and other popular sources of data. I’ve used both of the companies' products and can testify to the superiority of Datawatch’s Monarch.

In April 2003, Pervasive Software (NASDAQ:PVSW) saw the potential of Data Junction's report mining software and purchased Data Junction for 22.1 million in cash and 5 million shares of PVSW (Pervasive) stock . The transaction was valued at a total of approximately $51.7 million, based upon Pervasive's closing price per share of $5.91 on August 8, 2003. At the time of the purchase, Data Junction had “more than 25,000 customers”. Datawatch’s desktop Monarch currently has over 400,000 growing license users worldwide. The Datawatch story, with their other rapidly growing BI solutions, make the current and future valuation significantly greater than the grossly undervalued price of 1.20 or 7.10 million market cap.

Another important valuation comparison is with Mobius (MOBI). Back on April 11, 2007, MOBI accepted an offer from the privately held Allen Systems Group for $10.05 cash per share. The total value of the offer was about 195 million.

Mobius resells the Datawatch data analytics product, Monarch, under the Mobius product name DocuAnalyzer. Datawatch now competes with Mobius on larger BI enterprise solutions.

Based on just a price to sales basis, DWCH would be valued at a multiple times the current price when compared to the MOBI all cash deal for $10.05. MOBI was sold for about 2.0 time sales. When compared to Datawach’s current .3 price to sales, I strongly believe that DWCH is temporarily selling at depressed prices with a loyal evangelical like customer base.

The major risks for DWCH are the world wide recession coupled with lack of Wall Street coverage. But there are several catalysts that may move the stock higher.

Catalysts

  • Older versions of Monarch will not be compatible with Vista (NASDAQ:MSFT). Some of their 400,000 customers will be forced to upgrade to version 9 or 10 if their company or personal computer is using Vista coupled with the significantly improved functionality.
  • A new CEO was put in place about a year ago with a proven track record selling large enterprise solutions with higher margins and recurring revenue steams from their new proven enterprise BI solutions.
  • Investment community recognizing the value based on sustainable high FCF and depth and bright prospects of product offerings.
  • New product upgrade Monarch version 10 just released in this current quarter.
  • International recognition of the significant cost benefit of using Datawatch technologies with no comparative value solution. Furthermore, Datatwatch recently embarked on a re-branding effort communicating their new focus on more profitable enterprise solutions.

Disclosure: Author holds a long position in DWCH