On July 19 I wrote an article in which I looked at TeamStaff (TSTF) and its key developments that caused the stock to rise by more than 200% during the previous 12 months. Now, 3 months later, the stock has increased by 50% and appears to be trending higher as the market recovers. Here I will look at the recent developments of TeamStaff and changes within the company that I believe will result in profitability during the next 12 months.
The chart above reflects the 2-year stock performance of TSTF, which show strong gains since April of this year. The July 19 article highlighted a few of the key developments that are responsible for the optimism surrounding this company, including insider purchases, contract extension with the VA, blanket purchase agreement from VA for outpatient pharmacy, and the Naval Surface Warfare contract, which have contributed to the large gains during this short period of time.
TeamStaff has received several awards over the last few months that have the potential to produce much revenue and profit for the company. This potential for profit has resulted in large gains, with an increase in volume and investors who are optimistic about this small company's future.
While I believe the company is moving in the right direction, there are still several questions yet to be answered, such as the amount the company will receive from the various contracts and awards. The company's press releases have used very large numbers when announcing the contracts, such as the $140 million outpatient pharmacy and the $5.3 billion Naval Surface contract. So far the company has simply announced the various awards and contracts and then listed the maximum amount of revenue possible.
I don't necessarily believe there are any issues with announcing the contracts in this way, because the company must then bid on the contracts within the awards for various jobs that it wishes to pursue. But It would be very difficult to give an accurate number or guidance, since it's unknown how many contracts the company will receive and what options will be exercised once the contract has been received. This leads to a bit of confusion among investors who try to decipher the information and may be trying to predict how much of the contract the company may receive. Therefore, the stock's performance has been a result of future expectations, which appear encouraging, with most investors viewing the large contracts as a sign of improvement within the company.
I credit the recent success of both the company and the stock to CEO Zachary Parker, because although we don't know how much of the awards TSTF will receive, it's still an honor to be a part of a $5.3 billion per year award in which the company can bid. This award, and others like it, are new contracts Parker has pursued and been successful in gaining the rights to. And with such a large amount of potential income from the award, investors should be encouraged, since TeamStaff has the luxury to choose the tasks that it believes will return the highest levels of profit. Even if the company were to bid on only 6% of the jobs and be awarded 2% of the tasks, it would result in more than $100 million per year, hypothetically, and that's just the Naval Surface Contract.
Therefore I believe the company's questions and concerns become its strength, and although speculation has driven the stock, investors can be assured that it's moving in the right direction. Because of these awards the company is now exposed to a higher level of revenue than it's been unable to access in the past, which means it no longer has to take low-profit IT jobs and can focus on the more profitable industries, such as healthcare.
One area the company must improve is its fundamentals, which give reasons for concern. TeamStaff hasn't posted a full year of net income since 2009, and the company's revenue has consistently declined over the last 5 years. The company's debt-to-assets ratio has increased of late, with its debt more than doubling year-over-year. The company also has much less cash year-over-year and nearly $62 million of an accumulated deficit.
In addition, it trades with a market cap of less than $14 million and returns a large amount of loss on both its equity and assets. Yet despite the financial warnings, I, along with many others, am looking past the company's accumulated fundamental issues and focusing on the future possibility of this small company that is rebranding itself and making changes for long-term success.
CEO Parker is changing the structure of this company, significantly increasing its presence in both the U.S. Army and the U.S. Navy, after recent contracts with both branches of the military. Parker appears to be making a change in the company from IT jobs to healthcare, with more emphasis on contracts that guarantee more cash to improve fundamentals over the long term. I believe Parker's focus on healthcare is in the best interests of the company and will result in large profits if the company continues to seek contracts in this fast-growing industry.
Each of the large awards TeamStaff has secured simply grants the company the right to bid to perform the service. As a result, it's impossible that TeamStaff would receive the contracts for even 10% of these large awards, such as the $5.3 billion per year Naval Surface Warfare. Instead TeamStaff will bid on the jobs it believes will return the highest profits over a period of several years. And investors are already seeing this action take place, with TeamStaff snatching up additional contracts over the last 3 months. These include:
- TACOM Omnibus III contract on August 16 for the U.S. Army, with a total contract value of $225 million through 2012. The company did not specify how much of the contract it will receive, but we do know that it gave TSTF a stronger presence with the U.S. Army, and that there are a total of 16 contractor teams eligible to compete for individual task orders.
- Multiple award contract for the VA on October 6 to support the Baltimore Medical Center. TeamStaff was one of three companies awarded the contract to provide clinical services to the VA Baltimore Medical Center with high-level nursing services over 5 years. The contract is worth a maximum of $9,856,600 if all options are exercised.
Awards such as these are coming in often for this company, yet the total value of the contracts remains speculative. This fact has been frustrating to investors who want the company to provide a number when announcing the awarded contracts. However, I believe the company does not give specific numbers because it does not know what amount it will receive. The company bids on the contracts, and while it's received several contracts, the awards have several levels of revenue with options that can be exercised. Therefore it's hard to predict how much and when the revenue will reflect on the company's income statement or balance sheet.
In my previous article I gave a $6 price target for TSTF by the end of December, and now that 3 months have passed, I realize my original projection was a little too high. However, I do believe the company will easily exceed this target within one year, because of its success in receiving these contracts, and I believe the company will achieve profitability in the near future.
The only problem is that it will take time for each of the contracts to reflect on the company's income statement, and we don't know the date in which awards will be paid. There are probably a few of the contracts which will start payment immediately; others may take 6 months to one year before the company receives payment. Therefore I believe it could take 6 months and possibly a year before the company's revenue drastically increases or it achieves profitability.
I will conclude by saying once again I am extremely pleased with the changes Parker has made during his time as the CEO at TeamStaff. I believe the strategic decisions the company is implementing will result in long-term profit and gains for its shareholders. I expect Zachary Parker to continue focusing on healthcare, as government cuts should lead to a higher rate of outsourcing, which should benefit companies like TeamStaff. In addition the healthcare industry is much more profitable and should give TeamStaff some balance, now that it has a strong presence in both the U.S. Army and Navy.
Based on the company's most recent awards and contracts, we can see that it's focusing on healthcare and that it's no longer pursuing the IT jobs or low-end contracts, but rather contracts that can help it achieve profitability. As the new contracts are executed, the company's stock should continue to rise, with profits that are almost guaranteed in the coming years.
Disclosure: I am long TSTF.
Disclaimer: As with any investment, due diligence is required. The opinions in this article are not intended to be used to make a particular investment or follow a particular strategy.