On June 25th, I attended the micro-cap conference organized by Sidoti and Company. Over 75 companies presented with different companies in different rooms simultaneously, each presenting for forty five minutes to an hour. I picked four companies I was interested in and attended their presentations. Below I have summarized the important points about each presentation and my opinion on the company and its stock.
BioClinica (BIOC) provides integrated technology-enhanced clinical trial services to the global pharmaceutical market. Over the past few quarters, revenue growth has been achieved organically as well as through acquisitions. The company recently acquired TranSenda, which provides clinical trial management software solutions based on Microsoft Office tools. BioClinica expects to leverage its high fixed costs across volume gains and widen its operating margin.
The company had revenue growth of 17% in 2007, 46% in 2008 and 5% in 2009. The stock closed at $4.06 as of June 25th, and trades approximately a trailing P/E of 13 ex-cash. They are in an industry with potential and can achieve high single digit growth in the next few years. Given where the stock is at currently, I believe it trades at a cheap to fair price given the risks. For me to dip my toe into this one, I would wait to see if I can get it cheaper to give me a good risk/reward scenario. While it’s a decent investment at this price for the long term, I recommend holding off on this one till a cheaper day unless you see some compelling reason to do so right now.
Xeta (XETA) operates as an integrator of advanced communications technologies in the US. It operates in three segments: Services, Commercial System Sales, and Hospitality System Sales. It derives a majority of its revenue from Avaya, Nortel (NRTLQ.PK), Mitel (MITL), Samsung (SSNLF.PK) and HP (HPQ). The CEO stated that Avaya and Nortel together would boost Xeta’s business as it’s the only national vendor with existing competencies there. He expects Xeta to achieve 15% growth for the next 3-5 years and believes that the growing base of recurring revenue will drive earnings growth and predictability. The company will shift its future mix of services more towards the maintenance and repair business which would account for 67% of its business from the current level of 60%.
The growth of Xeta’s revenues of the past three years has been stagnant. While I believe the 15% growth target is definitely possible this year because of the orders they have booked for the second half of this year, I don’t believe this is sustainable as this is just a rebound they have witnessed with corporations spending more. I am not writing them off, but I do believe that they are not a 15% sustainable growth candidate either. They have turned the corner from a loss last year to a profitable last two quarters. They are sensitive to the companies they deal with which in turn are sensitive to economic conditions in the US. I expect them to earn around $0.15-$0.20 this year and with no debt on its balance sheet and a tangible book of $3, the stock at $3.2 is definitely not too expensive. I am not keen on the prospects but at a cheaper price, I would take another look.
SinoHub (SIHI), based in Shenzhen, China is an electronics company whose major growth driver is manufacturing and distributing custom private label mobile phones for developing countries. Their success emanates from industry knowledge gained through their Web-based platform, which services customers of their electronic component purchasing and supply chain management businesses. They leverage their proprietary platform and the highly fragmented market, to drive their growth. Their three main business unties are: Supply Chain Management (SCM), Electronic Component Purchasing (ECP) and Virtual Contract Manufacturing (VCM). They deal primarily in the emerging markets and have produced high growth over the past three years.
SinoHub has had a high double digit growth rate for the last few years with 62% in 2009 and expects to grow revenues around 30-40% for the next couple of years. I believe this company will grow its revenues and earnings greater than 20% for the next two years, but it may face challenges thereafter if AAPL or RIMM start to get a higher penetration into the emerging markets or another firm breaks into the market and competes with SinoHub. Since they benefit from open systems, Android growth is favorable to them. The stock currently trades at a trailing P/E of a little over 5 and with the growth this company can achieve over the near term at least, I consider this very cheap. However, there were a few concerns I had which I addressed to the CEO. They were :
Q1: If you believe your company trades at a deep discount at 5 times earnings, why did you issue equity in a private deal at $3/share?
A: We did not want to use operating capital for expenses associated with fitting out our new factory and we had already made commitments before we realized that the pricing would be so bad.
Q2: You recently got a line of $14 million, could you please explain why this money would be needed? I understand its for the VCM, but can you explain more. You already have $10 million of cash on your sheet?
A: We will use the new bank lines for both supporting VCM and ECM. Remember that balance sheets as of one day. These numbers change through time based on business requirements.
Q3: Can you please explain the increase in accounts receivable?
A: Q1 is a bad collections quarter in China every year. No one pays around the Chinese New Year holiday.
I felt his answers were fair, but should I see more equity offerings made at bad prices, I would become a seller. Another issue was a beneficial owner Rejbo Jan offloading 500,000 shares recently. However, he still holds 3.9 million shares and the CEO, Harry Cochran owns 3.9 million shares as well. Once again, should I see more offloading of shares, I would become a seller. So with that in mind, I believe SinoHub is a great buying opportunity with great growth potential in the near term. I think fair value of this stock is in the $4-$5 range given the risks inherent this business. However, any insider selling or another bad equity offering would make me a seller, and even that risk is factored into a $4.50 price.
Theragenics (TGX) produces branded surgical products and components sold to OEM customers whose markets include interventional cardiology and radiology, vascular, orthopedic, plastic, dental and spinal surgery, urology, veterinary medicine, pain management and endoscopy. While the surgical components side has shown good growth, the brachytherapy business has been falling and fell 15% in 2008 and 14% in 2009 and accounts for about a fourth of the company’s business. Analysts expect it to fall for the next couple of years as well.
While the company’s revenue has shown single digit growth despite the brachytherapy business slowing down, earnings have been dismal. Analysts expect earnings between $0 and $0.05 for the next couple of years. The stock itself trades at 35% discount to book and I addressed this question the CFO.
Q: The book value of your stock is close to $2 and your stock currently trades at $1.20, why is that, what do you think the market is pricing in, do you expect further write-downs?
A: We have had write-downs in the past and it is hard for me to speculate if we will have to do so in the future, I hope not. That said, we have good growth and the business in the surgical components space is experiencing good growth, so we expect to do well.
I believe a lot of bad news is already priced into the stock of Theragenics at $1.20. The good news is that they do have net cash on their books. However, I still can’t be a buyer of this company at that price as I don’t see revenue drivers that translate into solid earnings going forward. The company has to some extent stagnated and a business line that is experiencing negative growth and until I see a compelling driver of growth that can be converted into good earnings, I can’t pull the trigger on this one. That said, they do have good cash flows but I am just not convinced of the fundamental business story.
Disclosure: Long SIHI