Bitstream a 'Hold' on Continued Weakness

| About: Bitstream Inc. (BITS)

During the week of November 6, 2006, I posted only a single stock pick, Bitstream (NASDAQ:BITS).  On November 8, 2006, BITS was trading at $9.61/share.  On July 11, Bitstream closed at $5.987, for a loss of $3.623 or 37.7% since posting.  I do not own any shares or options in this stock.

Let's take another look at this stock and see if it still deserves a 'buy rating' on this blog!

What does the company do?

According to the Yahoo "Profile" on Bitstream, the company

operates as a software development company in the United States. The company offers font technology products comprising Font Fusion, a font rendering subsystem that enables developers of embedded systems to render characters in various languages and formats on hardware device; Bitstream Panorama, a global text composition engine, which enables developers to draw strings of characters and lay out complex lines of text; btX3, a font subsystem that allows Linux developers to access worldwide fonts; TrueDoc, a portable font technology, which distributes text with fidelity; and TrueDoc Imaging System subsystem for developers of operating systems, servers, applications, printers, and printer controllers to provide scaleable resident fonts, as well as Bitstream Typeface Library, BTN Library, Certified Simplified Chinese GB18030 Font, Asian Stroke-Based Fonts, International Fonts, Tiresias Screenfont, Closed Caption Television Font Set and TV Font Pack, and MobileFonts.

How did they do in the latest quarter?

On May 14, 2008, Bitstream reported its first quarter 2008 results.  Revenue for the quarter ended March 31, 2007, increased 16% to $6.37 million compared to $5.49 million during the same period last year. Net income dipped $57,000 or 8% to $659,000 or $0.06/diluted share down from $716,000 or $0.07/diluted share the prior year.

How do longer-term results look?

Reviewing the "5-Yr Restated" financials, we can see that revenue growth remains uninterrupted from 2003 when the company had $10 million in sales and has more than doubled revenue to $24 million in 2007.  Earnings have improved from a loss of $0.14/share in 2003 to $.36/share in 2007 and $.35/share in the TTM.  Free cash flow also continues to show growth with $5 million reported for 2007 up from $1 million in 2005.  

Finally, the balance sheet appears solid with $15 million in cash and $3 million in other current assets.  This can easily cover the $4.3 million in current liabilities (yielding a current ratio of over 4).  No long-term liabilities are reported. 

Except for the slight dip in earnings, the report appears intact.

What about the chart?

Looking at the 'point and figure' chart on Bitstream, we can see how the price of the stock broke down below the 'support line' in July 2007 when it dipped down to $5/share, which it reached in January 2008.  The stock actually appears to be on a slight rebound since May 2008.  But certainly, the chart shows continued weakness after the stock peaked at $12 in February 2007. 



With the weak price performance since being "picked,' the mixed bag in the earnings department with revenue up nicely and earnings dipping slightly, but with the overall intact page, the best I can do  is...


I am much better at determining when a stock might be a "buy" than determining whether it should now be a "hold" or a "sell."  However, with the stock already off 50% of its high, it seems a bit late to be advocating a sell on this stock.

Bitstream was the only stock I discussed that week in November in 2006.  Thus, my overall performance for the week was a mediocre loss of 37.7%.  This once again underlines the importance of limiting losses on all stock purchases.  I am not one to ride a stock down waiting to see the stock climb once again.

Disclosure:  The author does not own BITS.