Editors' Note: This article discusses micro-cap stocks. Please be aware of the risks associated with these stocks.
Simple questions are rarely accompanied by simple answers. This is a fundamental frustration for the majority of the general public. Most people would like to believe that a simple inquiry would automatically garner a simple response. Unfortunately, for those people, this is seldom the case. The fact of the matter is, answers are largely derived from perception, and as a result, simplicity and uniformity across mass opinion are routinely elusive. Such is evident each time someone asks the following question; what is it that makes a market? On its own, this question appears simple enough. The average market observer, or the prototypical high school economics teacher, would likely answer this question with an over simplified summation of supply and demand and its correlation with consumer interest. In fairness, such a response would not be incorrect. However, such a reply would also be far from a complete and thorough answer.
From the perspective of an economist, or any reasonably educated market observer, the makings of a market combine a subjective and ambiguous array of disagreement, with an egocentric pattern of hubris and false certainty. In other words, the market is made by revolving differences of opinion. For every buyer, there must be a seller. For every critic, there must be a proponent. For every skeptic, there must be a believer. That is what makes a market; the ongoing and reciprocal, ever changing opinions, of analysts, shareholders, and economists. Supply and demand is, after all, nothing more than swings in consumer momentum, interest, need, and estimation. This is why, at any given moment, two people can look at the same stock and see two completely different things. One sees opportunity, where another sees inevitable demise.
In the micro-cap sector of the market, these differences of opinion are quite pronounced. Given the highly speculative and frequently volatile nature of this market segment, opinions tend to vary to a substantial degree. Such is the case for WidePoint Corporation (NYSEMKT:WYY), a leading provider of advanced information technology solutions to government and commercial markets. Recently, a number of articles have surfaced which warn investors that WidePoint is moving into "overbought territory", and indicate that "trouble may exist down the road". While these assessments have certainly come from a reputable and highly regarded source, it is the contention of this article that WidePoint in fact offers significant upside, and could well be undervalued.
An Overview of the WidePoint Corporation
WidePoint is headquartered in McClean, Virginia and currently employs 227 people. Having been incorporated in May of 1997, the company operates in three principal segments. These three segments are communications management, cyber security solutions, and consulting services. Through WidePoint's collection of wholly owned subsidiaries, the company manages telecom expenses and devices, delivers identity management solutions, offers a range of information technology services, and provides products to support its client's needs. Itemization of the company's services by segment are identified in greater detail directly below:
The company offers a "Bands of Minutes" approach that takes advantage of bulk savings for its clients by utilizing all available voice, data and message plans offered by the carriers. It provides a variety of reports that provide data for ongoing periodic reviews and strategic decision-making. It also provides secured solutions for its clients' telecom assets.
Cyber Security Solutions
WidePoint's wholly owned subsidiary, ORC, is certified by the federal government to facilitate public access to the services offered by government agencies, including on-line access to computers for purposes of reviewing, retrieving, providing, and exchanging information. Its digital certificate credentials are authorized to provide trusted individual or business identity information for use by the Department of Defense, FirstGov, the General Services Administration, and participating federal government agencies. Its digital certificate credential services include the Department of Defense's External Certificate Authority, Access Certificates for Electronic Services, and the General Services Administration Shared Service Provider. It also provides an analysis of an organization's business and technical policies across application and data resources for the implementation of various devices, such as smart cards, security tokens, cell phones and personal computers. The company then further implements these capabilities by incorporating higher levels of automated infrastructure.
Consulting Services and Products
The company offers IT architecture and planning services to ensure that its clients get the most from their IT investments. The "System Integration Services Team" specializes in the areas of infrastructure management, applications management, and IT strategic planning. They provide a range of IA support services to help its customers to protect and defend information, and information systems, by ensuring confidentiality, integrity, authentication, availability, and non-repudiation. In addition, its IA services include strategic risk analysis and management support that includes physical security, reliability, continuity of operations planning, and support for other enterprise governance issues, such as privacy, compliance, audits and disaster recovery.
WidePoint currently provides services for over 50 clients through a collection of Government Wide Acquisition Contract agreements, and is in possession of an estimated 175 million dollars of contracted capitalization potential under current contracted terms.
The Argument Against WidePoint as an Investment Vehicle
Since the middle of November, WidePoint has seen significant upward movement in its share price. Having grown from 80 cents per share on November 15th, to its current value of $1.27 per share, shareholders have seen an increase of 63% in less than a month's time. Needless to say, that is considerable. This event motivated Zacks Equity Research to report on December 2nd that the stock was approaching overbought territory with a relative strength index value of 71.6. As a result, this same firm is currently suggesting that "investors may want to consider exiting this stock now before it falls back to Earth." They also maintain a Strong Sell rating on the stock. Furthermore, on December 9th, in reaction to continued upward momentum since December 2nd, the firm reported that their consensus estimates had moved lower during the same period, indicating that trouble may exist "down the road" for WidePoint.
These forecasts, assessments, and assertions are not without a reasonable basis. Zacks Earnings ESP tool currently measures WidePoint at 0.00%. Furthermore, WidePoint's total current assets and revenues have decreased year-to-date. Therefore, it stands to reason, that these reports are reflective of statistically relevant data pertinent to the thorough evaluation of a company as a potential investment. It is not, however, the whole story.
Why WidePoint is an Investment Worthy of Consideration
As was stated herein, a market is built on disagreement. Where one analyst, algorithm, or data theorem sees risk, another can see reward. Therefore, where there exists a reasonable and tangible argument against WidePoint as an investment, there is an equitable argument for the company as a quite enticing investment opportunity.
For the quarter ending at WidePoint on September 30, 2013, the cursory data may appear less than impressive. Net revenue decreased 14% to 35.5 million dollars, down from 41.1 million dollars during last year's comparable nine month period. Income from operations also decreased significantly falling to only 8,000 dollars from the 110,000 dollars earned last year over the same period. Moreover, for the comparable three month period, business operations in 2013 reported a loss of 54,000 dollars compared to income from operations of 459,000 dollars a year prior. However, in consideration of existing margins, and in respect to strides being made to pay down debts and control expenses, the report looks much better. Consider the following points of reference in applicable context;
- Gross profit increased to 28% of revenue as compared to 24% in last year's comparable nine month period
- Net income was approximately 399,000 dollars as compared to a net loss of approximately 1,000 dollars in last year's comparable nine month period
- Net income was approximately 295,000 dollars compared to a net income of approximately 244,000 in last year's third quarter for that three month period
In addition, consider the following achievements earned for the quarter indicative of future growth and success;
- Won five new account relationships with Forbes 500 clients
- Consummated a software licensing agreement which effectively converted 14 commercial clients over to the company's telecommunications management services platform
- Saw renewals of, or establishments of, contracts with three U.S. based Federal Contractors for cyber security services, and customized security solutions
- Was awarded contracts for three new state telecommunications projects
In addressing the quarterly performance, the company's CEO Steve Komar, made the following statement;
"During the third quarter, we faced some headwinds that impacted our revenue performance, including federal government sequester-related purchase delays, and slowed contracting pipeline and implementation attributed to the pending federal government shutdown. That said, our sales and marketing efforts, featuring a deployed national direct sales force and re-positioned portfolio of services solutions, continue to accelerate with growing pipelines and new awards. We are also very pleased with the start of the selective demonstrations of our new 'Cert on Chip'/Mobile Security Management capability, developed specifically to meet the identity protection needs of the mobile communications environment."
In addressing the same quarterly performance, the company's CFO, James McCubbin, made the following statement;
"We continue to invest, manage, and balance our capital around our operating income, all while continuing to pay down debt. We've achieved this balance while also funding the reinvestment programs we launched in 2013 to competitively reposition the company in future years."
These achievements, comments, and contextual circumstances indicate that the third quarter for the company was considerably more successful than would have otherwise been indicated. However, it has been the events since the third quarter which have been further indication of WidePoint's prospectively prosperous future. On December 2nd, WidePoint entered into a potentially lucrative services agreement with Compass Group PLC (OTCPK:CMPGF), one of the world's largest food and support services companies, with annual revenue in excess of 27 billion dollars, and over half a million employees worldwide. The new agreement anticipates WidePoint providing a full menu of managed mobility solutions to Compass locations worldwide. Compass, in return, will also offer WidePoint's portfolio of cost-effective services through their committed customers and partners program. This will allow for considerably greater exposure of WidePoint's services and products to potential clients it would not have otherwise reached. Furthermore, having entered into an agreement with Compass, WidePoint is automatically in possession of validation of its services value to the clients that Compass already serves.
In response to this agreement having been entered into, WidePoint Chief Sales and Marketing Officer John Atkinson said the following;
"We are pleased to announce this new international agreement. It builds upon several years of U.S.-based performance supporting Compass, and expands our relationship by showcasing our abilities to support our global clients beyond the constraints and limitations of national boundaries."
WidePoint's CEO, Mr. Komar, followed up this statement with a statement of his own;
"This agreement will allow us to demonstrate our managed mobility services on an international stage. As we continue to converge and build out an Enterprise-wide suite of solutions, including identity management and other mobile management solutions, this agreement should clearly show how our integrated managed mobility offerings can assist other organizations, both public and private, to realize greater security, visibility, and cost saving services across their entire sphere of business operations."
Assessment and Valuation
As an investment, WidePoint presents with many asymmetrical characteristics. First, the downside is protected by three major elements: (1) WidePoint serves government and commercial clients who offer a considerably higher rate of retention, stability, longevity, and reciprocity than do private sector or smaller clients (2) WidePoint maintains 12.4% of its shares held by insiders, which indicates that shareholder interest is therefore aligned with executive interest (3) 21.8% of shares are held by institutional investors, which reflects a high rate of confidence in growth and performance moving forward. In addition to these facts, the company maintains a sizeable float of 56 million shares, weighed against 64 million total outstanding shares. The float, combined with WidePoint's beta of .82, indicates considerable stability for a micro-cap investment and minimizes potential volatility moving forward.
Secondly, in terms of the company's valuation, WidePoint is arguably undervalued at the present time. The current market cap of 82 million dollars appears well beyond conservative. With 175 million dollars in current capitalization opportunities under contract, and the recent agreement entered into with Compass Group PLC, it appears as though the market has yet to fully value WidePoint's revenue producing assets and potential. Assume that WidePoint capitalizes on 75% of its currently contracted potential; that would equate to 131 million. Add to that the fact that nearly 1.5% of the Compass Group PLC's international revenues are derived from orders and services derivative of their mobility services platforms (now being provided by WidePoint), and assume that no less than 15% of that 1.5% is paid back to WidePoint. That would be equal to another 61 million in market capitalization. If the company continued to trade at its current rate times earnings, at an adjusted market cap of 192 million, then its fair market value would equate to an equitable price of three dollars per share.
As is the case with any micro-cap investment there exists measurable risk in considering the assumption of a position in WidePoint. The company's current cash position is a mere 2.4 million dollars; reflective of only four cents per share. Long-term debt is currently equal to 3.65 million dollars. Furthermore, the companies with whom WidePoint competes with are equally reputable companies with considerably larger shares of the current market. These competitors include, but are not limited to, Lionbridge Technologies (NASDAQ:LIOX), Syntel Incorporated (NASDAQ:SYNT), and the Sapient Corporation (NASDAQ:SAPE). Lastly, the cyber security and IT services sector is one that is in a state of constant evolution. To remain competitive, and growth oriented, one must persistently be aggressive, proactive, innovative, and inventive. Keeping pace with the industry, and the threats to the industry, requires constant devotion to improvement and advancement. For a micro-cap company such as WidePoint, any small mistake or miscalculation could compromise its ability to seize opportunities from its competitors.
Markets are created through disagreement and perception. This article is obviously in contrast to the opinions recently published by other reputable entities as it pertains to WidePoint. However, it is the contention of this article, that the criticism of WidePoint's recent upward trend is strictly the product of over simplified metric analysis, and not of current circumstances in context. The company is paying down its debts without neglecting its commitment to growth. It is renewing current contracts, as well as establishing new ones. It is servicing existing clients, and procuring partnerships with new allies. The company is managing to be both responsible and assertive. In consideration of events at WidePoint over the last five months, and as is indicative of the details herein, it appears that 2014 will be a year of significant growth for the company. This analysis foresees a 12 month price target of 3 dollars per share as more than reasonable. Prospective investors would be wise to consider the addition of WidePoint shares to their portfolios.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Please note that credit for the itemization of services synopsis was summarized from Reuters. In addition, the estimate for institutional ownership varies from source to source, however the estimation provided herein was congruent with both SEC filings and the projection provided from thestreet.com.