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Business process outsourcing provider, TechTeam Global, Inc. (TEAM) reported a penny loss on sales of $40.9 million in the second quarter 2006. Operating expenses incurred in responding to a dissident shareholder action siphoned $0.06 off EPS. TechTeam reported $251,000 in extra legal fees and $600,000 in charges to reimburse a hedge fund Costa Brava Partnership, a significant shareholder, it incurred in proposing an altenative slate of directors.

Excluding those unusual operating charges, TechTeam would have reported positive earnings of $0.05 per share, just one penny below our estimate for the quarter. Management projects that the Computer Associates (CA) partnership could yield incremental sales of $10.0 million in 2007 and the TechTeam will have a presense in the fast growing Asia market by 1H07. Despite the new CEO's valiant effort to institute a higher level of accountability into the business development and sale process, we have some concerns about whether there will be enough momentum to reach the sales targets we set in our previous 2006 and 2007 estimates.

Accordingly, we lowered our top-line growth rate and increased cost assumptions for 2006 yielding a new sales estimate of $167.7 million, providing net income of $1.4 million or $0.14 per share (from $179.8 million, $4.0 million and $0.40).  Our 2007 estimates are likewise reduced to $184.3 million in sales, $6.0 million in net income or $0.57 per share (from $200.0 million, $7.8 million and $0.74).

The stock has the look of a great bargain against even our reduced estimates. At the current price level TEAM is trading at 12.6 times our 2007 EPS estimate of $0.57. Our price target of $13.75 represents a multiple of 24.1 times, well below the stock's current trailing PE of 31.3 times. Typically we like the chance to buy a well run operation with strong leadership at depressed stock prices. Unfortunately, given the appearance of weakness in the new Board of Directors, we now consider it a new risk factor.

The new Board, which was installed in June 2006, was supposed to be a "different talent set" which would restore confidence in the Company. In our view, the new group, which includes a representative from the camp of the dissident shareholder, Costa Brava Partnership, has accomplished little so far except to tag along with the leadership and plans put into place by the previous, supposedly compromised set of directors. The new directors simply endorsed the growth strategy originated by Chris Brown when he was hired by the previous Board as the new CEO at the beginning of 2006.

While we believe it is an excellent strategy, we expected the new Board in particular to waste no time in putting its mark on the roadmap. Accordingly, we changed our rating from Buy to Hold and retained our price target at $13.75 for TEAM. In our view, there are insufficient catalysts on the horizon to offset the image of the new Board as a "dud" and the loss of confidence on the Street in the TechTeam operation.

TEAM 1-yr chart:

Source: New TechTeam Board a Dud?