- Department of Homeland Security blanket $600M contract ramping up now (Q2 2014).
- Successful strategic turnaround during 2013.
- $12.5MM in funds from stock offering already being put to use for inorganic growth.
- Organic growth opportunities are readily available as proven by recent security breaches.
WidePoint (WYY) is highly discounted, given its current position. It is poised to show growth from contracts already in place and is well positioned to created additional organic and inorganic growth. As these revenues are realized, based on current gross margins and fixed operating expenses, my price point for the next 6-12 months is $2.60. Over the next 12-24 months as many contracts are fully ramped up, it is my opinion that a price point of $5.60 is reasonable.
Blanket $600M contract
WidePoint received a $600M blanket contract with Homeland Security in the second quarter of 2013. This contract is to be exercised over the next 5 years. A competitor contested the contract twice, which delayed the initial start date. The contract was enforced in favor of WidePoint on December 13th, 2013. The first project for Homeland Security is currently in production. The revenues from this contract will begin to be seen this year, but it is expected that a full year's of production on the contract won't be seen until 2015. Management is forecasting this contract will ramp up gross revenues by $75 - $100 million.
Successful strategic turnaround during 2014
While WidePoint's revenues decreased 16% from 2012-2013, they were successful in transitioning their sales strategy to promote future growth. They successfully completed the following:
- Hiring John Atkinson as Executive Vice President of Sales and Marketing: John has over 28 years of experience in the technology sector. He is working to reposition sales and marketing teams to meet the expected sales growth.
- Expanded the indirect distribution channel partner program to drive sales growth toward higher margin sales. Most notable partnerships in 2013- Compass Group PLC and Truphone; in 2014- Wave Systems.
- All debt was paid off in 2013 which was a primary goal going into 2013
$12.5M Stock offering
On March 3, 2014, WidePoint completed an underwritten public offering of 9,057,972 shares of common stock at a purchase price of $1.38 per share, bringing in approximately $12.5M in funds. On May 6, 2014, it was announced that WidePoint was purchasing Soft-ex. Soft-ex is expected to bring an additional $6M in revenues each year. Steve Komar, (CEO of WidePoint) noted that "The combination of WidePoint's Secure Managed Mobility Solutions coupled with Soft-ex's European and Middle East presence, channel partners, and additional portfolio of services provides our combined operations with a stronger base of operations, services, and global growth opportunities."
While the stock offering increased the shares outstanding substantially (about 14%), the price already shows the dilution of the stock. Since WidePoint management had a key goal in 2013 of paying off debt, it is my speculation that an additional stock offering may occur down the road if additional funds are needed beyond the income from operations. My 12-24 month price point actually takes into account an additional dilution of share value due to a stock offering in order to remain conservative.
Organic growth opportunities
As the business world moves more toward advanced technologies, companies' servers are replaced by "The Cloud", and company supplied BlackBerrys are switching to a BYOD (Bring Your Own Devise) environment. Every business needs to protect their most valuable asset, information. Recent security breaches: Target, AOL, Indiana University, Internet Explorer, Heartbleed, and Apple's iOS are made very public, very quickly and this is one situation where it's safe to say that not all publicity is good publicity. This has been made very clear with the Target situation, and as these security breaches increase, companies will have to look for solutions. WidePoint can provide those solutions.
It may take some time to get the DHS contract fully ramped up. As 2014 progresses, it is expected that revenues from the DHS contract start to show. The $2.60 price point takes into consideration revenues from last year $46.825M, growth of $37.500M from the DHS contract and $2.500M. WidePoint management is working to improve margins, but assuming gross margins stay at 2013 level of 25.9% and operational expenses are held to $13MM, the EPS would be at $.129. Given a P/E multiple of 20x, due to the level of expected growth, I get a price point of $2.58 or $2.60.
Over the next 12-24 months, as contracts ramp up, additional capital may be needed. With WidePoint being fairly debt averse, I'm leaving room for an additional 22M shares to be added to the shares outstanding. This would allow for sufficient capital to cover additional working capital needs or inorganic growth opportunities that are presented. Assuming $46.825M in revenues from last year, adding on $100M for a combination of the DHS contract and any organic growth opportunities, an additional $6M from their recent acquisition of Soft-ex, the same gross margin and operational expenses as the scenario above, and having an additional 22M shares of WidePoint in the market, WidePoint would end up with an EPS of $.279. Given a 20x P/E multiplier, the price point comes to $5.59 or $5.60.
Risks and Mitigating Factors
Listed below are some of the primary risks of WidePoint, along with what makes the investment worthwhile.
Risk 1: Highly Competitive Market- Competition could put pressure on the company's margins in the future.
Mitigating Factor 1: WidePoint has historically proven their ability to bring in multiple government contracts. Management is focused on moving business to more profitable products in the company (as shown in 2013). Even with macro pressures on the margins, management should have the ability to at a minimum maintain current margins.
Risk 2: Heavy customer concentrations- the loss of some large customers would negatively impact revenue growth.
Mitigating Factor 2: The majority of the large customer concentrations are concentrated on government security. While the government does continue to look at budget cuts, security will be one of the last to be cut. Given the continually advancements in technologies, these contracts should end up a continual source of income for years to come.
Risk 3: WidePoint's average trading volume can make the stock difficult to trade in larger amounts.
Mitigating Factor 3: While this isn't necessarily a risk for your small time investor, if you are looking to move substantial shares, it will be difficult to get the exact price you are after. The only mitigating factor at this point is that even with some difficulties buying and selling, the potential upside, in my opinion, far outweighs the difficulties.
Editor's Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.