What Lies Ahead For Carrier Access Corporation?

I have long-term gains in Carrier Access Corporation (CACS) overall, but it has been quite volatile recently and well off its recent highs. On July 31, 2007, Carrier's board of directors said they have "begun the process of evaluating strategic alternatives to maximize shareholder value. Carrier Access has retained Jefferies Broadview as its adviser in this process." What lies ahead?

CACS at $4.30 currently sells for 3.21 times sales ($44.9M) and 1.14 times book value ($3.66/share).

Let us assume CACS sells its business and distributes the cash to shareholders along with the $2.54 per share it has in cash.

This article says a recent sale of a portion of their technology by Vitesse to Maxim went for 2.5 to 3.0 times sales.

Assume CACS can get 2.5 times its $44.9M in sales by selling the business to become a "shell company" with no assets but cash.

$44.9M x 2.5 = $112.25M sales price

Subtract 6% for investment bank fees for $105.5M Call it $105M

Divide that by 17.32 million shares outstanding for cash per share: ($105M / 17.32M shares) for $6.09 per share

Add that cash back to the cash they have and CACS would have total cash value of $6.09 + $2.54 = $8.63

The mean of the liquidation value of $2.54 for their cash and my low-ball estimate of $8.63 for the cash plus the enterprise value of the business is $5.59 a share, give or take. This is probably not an unreasonable valuation for CACS given it could double if sold out or goes to zero. The CEO and his wife hold 46% of the shares so I believe their interests are well aligned with shareholders.

The above analysis should make it clear that any increase in sales greatly magnifies the value of CACS so if they can turn around sales and show revenue growth, perhaps with the Tellabs (TLAB) partnership, then the company should turn this around. Like CACS, Tellabs' stock was much higher in 2000.

My goal has been to accumulate shares in telecom after the first bubble burst in the hope that its potential eventually shows up and we get another bubble to sell into. Look back at the biotech companies such as Genentech (DNA) and you see several peaks with major periods of valleys. The valleys are great times to accumulate while you wait for the next peak to sell into. The DNA chart shows it took over 10 years for DNA to reach its 1987 peak. For CACS, we are now nearly 8 years from its peak. Even if CACS does not hit a new peak, I believe CACS can continue to make good money trading its ups and downs using the above guidelines for valuation.

Disclosure: Author has a long position in CACS