Datawatch: A Microcap Value Stock

Datawatch (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 (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 (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

Comments

[Uncharted S...:]

Datawatch is an undervalued software company, no doubt.

But I think that all of micro-cap is going to be in a rut given the simple fact that historical valuations are insanely cheap in the mid cap and large cap markets. Plus, you do not have to sacrifice the most important thing to institutional investors; liquidity.

PVSW is like watching paint dry. The stock has been a graveyard for five years and running.

Jan 06 04:09 PM

[John DiStan...:]

I agree with your all your points.

Another view is the potential to find extraordinary bargains with illiquid stock can be significant. Countless investors are speculating/investing in a relatively small group of heavily traded liquid stocks. This greatly lowers our chances of finding long term wealth building value. The ignored and neglected illiquid stocks have a higher chance of presenting us with dramatically undervalued securities. So if your goal is to maximize wealth, logic would dictate that your research investment efforts are best spent with illiquid stocks that have been avoided by the public and Wall Street

Jan 06 09:42 PM

[John DiStan...:]

“PVSW is like watching paint dry.”

Uncharted, this article was not about PVSW. But you helped make my point in the previous response. Its not sexy investing in micro cap value but you would agree if the goal is maximizing profit and not entertainment most professionals would kill to post the 8% steady gain realized by investing in a micro cap illiquid value stock like PVSW for the prior 12 months. The S&P index was down over 40% for the same time period. Boring yes ... rational market crushing investment returns yes.

Jan 06 10:11 PM