Startek's Star Customers

| About: Startek Inc. (SRT)

Startek (NYSE:SRT) makes for an intriguing value play. The company has $20 million worth of cash, but trades for just $38 million. Before the recession, this company was averaging more than $10 million in earnings per year.

Since 2007, however, Startek has been losing money. Can the company get back to its pre-2007 levels? Maybe. For those interested, there's in-depth analysis of this company and stock available here. (Unfortunately, you do have to register to access it though.)

But a major red flag for a long-term investor has to be this company's customer concentration. Startek derives more than 60% of its revenue from one customer (AT&T) and more than 80% of its revenue from its top two customers. While it's entirely possible that Startek will continue to meet the needs of these customers (in fact, it may even be probable), this is a huge risk.

If one of these customers (particularly the big one) decides to switch firms or develop the service in-house or has to shrink because of its own market positions, Startek will be left with a bunch of facilities with a whole lot of capacity. The downside risk may be great here despite the strong cash position. Of course, this risk may never bear itself out, but the ideal investments are those where risks are minimized and upside potential is high.

This company was in a similar position, and went bankrupt when its largest customer moved on. While Startek has enough cash to avoid bankruptcy, the loss of a major customer would likely destroy a whole lot of perceived value.