To access the SYMM full research report for free, click here.
Symmetricom's (NASDAQ:SYMM) shares offer a compelling risk/reward through (1) the emergence of a new SYMM book of business to offset the declining/at-risk components and (2) a present restructuring of operations/management. Investing at $4.50/share creates the company at 7.1x and 5.5x FY'14 and FY'15 base case EBITDA, respectively, in an industry where the closest comp, Frequency Electronics (NASDAQ:FEIM), trades at 8.7x a healthy LTM EBITDA by virtue of selling into contracted end-markets. This is a business that, outside the 2011 restructuring, has thrown off on average about $20MM of annual free cash flow even with recent EBITDA contraction. That's a 9x FCF multiple, 6x if you include the ~$70MM of cash on the books.
The fundamental value proposition for the timekeeping solutions industry has changed little over the years, but the shifting dynamics of protocols like IEEE 1588v2 and activities like offshore drilling reflect crucial inflection points. SYMM is cheap because the market is rightfully concerned with accelerated decline in "Old SYMM" business behind the defense sequester and wireline infrastructure cutbacks. "New SYMM" orders have heretofore remained relatively small and lumpy, but with realistic assumptions to support end-market ramp-up, the business' market leadership/partnerships in these new solutions and recent cost reduction efforts, I believe there is a good case here for a path to driving value.
Base case returns of +35% target a $6.08 price and reflect an averaging of DCF and multiples methods, though I would argue that the DCF is more indicative of the true story here as the shift from "Old SYMM" to "New SYMM" will probably take at least 2 years. The business currently trades at tangible book value; in a downside, I assume the business trades to a net-net value of $3.90/share ($160MM NCAV + $21MM in NOLs/R&D tax credits). Incidentally, this represents the stock's 3-year trough when a major restructuring (move to outsourcing) temporarily disrupted operations and sucked some cash out of the system.
The name is hardly covered by the sellside (only B. Riley and Sidoti). I sourced the idea from a CapIQ screen that I ran for small cap names that were trading at or below tangible book and which were particularly cheap on an FCF basis. The industry stood out as an area of technical interest, and the recent price action in the context of restructuring and a changing book of business got me thinking about a potential value play.
SYMM is presently $210MM revenue, $13.6MM EBITDA, $11.9MM FCF business through FY'13 (based roughly on management's FQ4 estimates). 55% of sales and 75-80% of EBIT are from the communications segment, with the remainder coming from government/enterprise. 60-65% of sales are from the United States with Europe and Asia covering most of the rest. The business is based out in San Jose, CA, and was founded in 1956. It is presently one of only two commercial suppliers (the other being Swatch's Oscilloquartz division) of cesium atomic clocks and contributes over 90% of Coordinated Universal Time (UTC), the globally accepted standard for civil timekeeping.
It grew differentially during the days of wireline infrastructure build-out before hitting a wall at the turn of the millennium, particularly in FY2002 when revenues declined (52%) because of one major contract loss. The Company completed major time and measurement business acquisitions the following year and stabilized through the rest of the decade under CEO Tom Steipp. Dave Côte took over after Steipp's retirement in June 2009 (incidentally after an 11% workforce reduction) and presided over SYMM's transition to an outsourced manufacturing model through plant consolidations/closures, launch of CSAC and development of the Syncworld Ecosystem Program to begin leveraging the PackeTime platform of solutions. In the current fiscal year, R&D spend has ramped up to 15%+ of sales (as the Company tries to build out a future product pipeline) while trimming its OpEx some $4MM YTD and planning another $13MM of labor/overhead cuts in lieu of declining legacy/government business.
PackeTime and CSAC (E&P and government) business are estimated to be about 40% of current revenue (per management's guidance on FQ2 earnings call) while Traditional Sync Solutions and government instruments and other frequency reference business fills much of the rest.
Before turning to the end-markets and their time standards, some further notes on the timekeeping nomenclature for a business like SYMM:
- The scales for timekeeping generally fall between atomic, astronomical and civil standards. The TAI scale is the international atomic scale based on a continuous counting of the metric second. GPS time is basically TAI time set to satellites and ground control stations. Astronomical time (UT1) is based on Earth's rotation (sunrise/sunset), which is slightly longer than 24 hours/day because the Earth wobbles when rotating on its axis. The civil (UTC) scale bridges the two and requires the periodic addition of 'leap seconds.' It is used to synchronize local and wide area networks (Internet). Addition of leap seconds has in the past been problematic for certain Internet systems, causing meaningful disruptions in air bookings for example (think a real version of Y2K) and the International Telecommunication Union is debating whether to abolish the practice altogether and seek a TAI-based alternative like PTP protocol.
- The major protocols for timekeeping are set out in the table below. Highlighted are chip scale atomic clocks and PTP, standards of the New SYMM book of business.
- Jun'13-Dec'13: Completion of workforce cost saving initiatives, spending $6.3MM of cash and targeting $13MM of annual run-rate savings
- Share buybacks: In November 2011, Board authorized 5MM (12% of float) buyback program after stock tanked post-restructuring announcement. 1.9MM of repurchase power remains outstanding although they have already closed their 10b-5 program. Buybacks were executed in the $5.60s during FY'12 (+24% current) and $6.20s during FY'13 (+37%). The company has $70MM of cash and equivalents, equivalent to 38% of the current market cap
- Dec'13, Jun'14: Leap second insertion (potentially done either June or December of a given year with a 6-month lead time) could cause major disruptions and accelerate conversion of time standards to PTP. On June 30, 2012, 400 Qantas (OTCPK:QUBSF) flights were delayed due to insertion. Mozilla, Reddit, LinkedIn (NYSE:LNKD) and others also crashed (Source)
- 2015: ITU meeting on potential decision to abolish leap seconds from civil timekeeping, fast tracking the conversion from NTP to PTP standards
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SYMM over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.