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  • This Tech Stock Deserves A Look

    (click to enlarge)Electro-Sensors Inc. (NASDAQ: ELSE) is beefing up its product portfolio. It disclosed earlier this year that it has acquired the advanced wireless product line from Harvest Engineering Inc.Reportedly, Harvest Engineering received $400,000 at the completion of the acquisition and will receive an additional $400,000 each on the second and third year subsequent to the closing date of the acquisition. The company was also able to seal a deal that will grant them a contingent bonus of $500,000 upon the achievement of certain performance measures.

    Electro-Sensors is currently marketing and selling these new hazard product lines under the brand name HazardPRO. They plan to manufacture and service them at its Minnetonka, Minnesota facility. The acquisition is value-accretive in the sense that Electro-Sensors has been in this market for over four decades. The distribution network, technical competency, and customer support capabilities have already been established.

    David Klenk, President of Electro-Sensors, confirmed this fact saying that the acquisition complements its existing hazard and monitoring and systems product line. He believes that the new addition to the product line will allow them to be able to compete effectively with their competitors being a low cost producer.

    First Quarter Results

    For the first quarter ended March 31, 2014, the company registered sales of $168,000, or an increase of 11 percent from the prior year. The increase in sales is primarily due to robust performance of its core business in North America, as well as international sales driven mostly by its Canadian business.

    Going forward, management expects the double-digit growth to be higher as it continues to pursue growth opportunities, which includes expansion of its product portfolios, partnerships, and related-product acquisitions.

    Further, it should be noted that the company continues to generate operating cash flow of $137,000, compared to the cash outflow of $240,000 experienced in the prior year. Operating cash flow will be used partially to fund capital expenditure, research and development and working capital. Management also believes that it has sufficient cash to fund the expansion program.

    Below Peers

    The current share price performance of Electro-Sensors has been disappointing. It has only gained 3 percent for the year. Over the last three months, share price has also been flat with an increase of 4 percent. However its peers, Ametek Inc. (NYSE: AME) and Danaher Corp. (NYSE: DHR), slightly declined by 2 percent each.In terms of valuation, Electro-Sensors shares are valued at 16 times earnings. On the other hand, Ametek and Danaher are priced at 24 times and 20 times, respectively.

    In addition to being a relatively undervalued stock, the company has less risk. It has net cash of $9 million as of present. At the current market capitalization of $14 million, this means that you are essentially buying a company that generates cash flow of $0.5 million at $5 million.At an effective cash flow yield of 10 percent, investors will be handsomely rewarded in the long-run.

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: ELSE, DHR
    Aug 19 10:47 AM | Link | Comment!
  • Why There Is Still Value In Zynga

    (click to enlarge)Over the past year, a barrage of negative commentaryhas been directed toward Zynga (NASDAQ: ZNGA). Intelligibly, the tremendous decline in its overall business has inspired little bullishness. Not only did Zynga's adjusted EBITDA decrease to $14 million in the first quarter of 2014, down from $29 million in the year-ago quarter, but its rival, King Digital Entertainment (NYSE: KING), has mercilessly 'crushed' it with the illustrious Candy Crush title; pun intended.

    With Zynga's earnings just around the corner, the company's spiraling fortunes, coupled with the feverish ramblings of persistently bearish commentators, have shifted investors' attention away from the bigger picture.

    New Direction

    Zynga is taking a new direction; one that doesn't fit into the whole 'King Digital is going to crush Zynga' argument. Even if we were to lend temporary credence to the argument, King Digital appears to be where Zynga was some while back - a great company with only one card to play. Besides Candy Crush, there are no other notable titles that can generate sufficient tailwinds to shore King's stock when (and not if) the next big mobile gaming company tears into the fore. Just like Zynga, which has "FarmVille", King will soon ride through the same motions as Zynga.

    Zynga, having been on the receiving end of a faddish mobile audience before, has turned a new leaf. Instead of relying heavily on titles which are subject to the faddish foibles of mobile gamers, it is redefining its user base through its most recent acquisition.

    Investors have not yet priced in the real value that the recent $527 million NaturalMotion acquisition presents. Contrary to expectations, the acquisition won't bring immediate visible changes. However, it will systematically shift Zynga's approach to gaming. This is because NaturalMotion's title, "Clumsy Ninja", gives Zynga a chance to leverage on a strong character IP for the first time. Moreover, the team behind NaturalMotion's Euphoria physics engine, which has not only been used for "Clumsy Ninja", but also for "Grand Theft Auto V", is now within Zynga's control. Besides the additional revenue, this system will help Zynga to release higher quality titles relative to the broader market.

    The renewed focus on building strong character IPs and improving quality means that Zynga is now looking to build its user-base the old fashioned way: tapping genuine interest, creating emotional attachment (through a central character) and maintaining comparatively higher quality. While this approach will take some time before restoring Zynga's lost glory, it will allow Zynga to create more engagement per user over a longer period than it would with its faddish titles. Similarly, it is more sustainable and affordable in the long run; as compared to the aggressive and intrusive marketing schemes that other game publishers use.

    Zynga's renewed approach to business will resuscitate its stock. At the current price, Zynga is a great bargain.

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: ZNGA, KING
    Aug 19 10:42 AM | Link | Comment!
  • Plenty Of Steam Left In WLFC And TA

    (click to enlarge)Stocks with impressive gains give investors an impression of being expensive in terms of valuations. This leads to lessen participation by investors as stocks gain, which seems to be the case with Willis Lease Finance Corporation (NASDAQ: WLFC) and TravelCenters of America LLC (NYSE: TA). Both stocks have gained handsomely in recent months, but it can be reasonably argued that the rally is unlikely to fizzle out any time soon.

    Shares of Willis Lease Finance Corporation have gained 20 percent during the last three months following the announcement of a joint venture in China. The company leases commercial aircraft engines and related equipment, and the equal stake venture will China will expand its already solid operations in a big way. Willis Lease already operates in more than 100 countries, but the opportunity in China is simply tremendous.

    Financial performance of the company in the latest quarter gives an indication of the kind of traction it has got lately. Revenues increased 21 percent to $43 million while net income more than doubled to $4.3 million, translating into a double digit margin. Although it has a high debt balance sheet, a steady increase in lease portfolio led to better capacity utilization. These tailwinds are expected to aid the company going further as it expands operations in newer markets. Meanwhile, the stock continues to be lucrative given the clear case of share prices trailing fundamentals. The stock offers 11 percent discount to its book value, while the forward price earnings ratio of 17 isn't too high.

    TravelCenters of America operates a chain of travel centers across the U.S. where it sells fuel oil and offers truck repair and maintenance facilities. The company also operates full service and quick service restaurants at the centers. Admittedly, the business is a mature one and thus is not likely to grow in excess of double digits year-on-year. At the same time, it is a consistent business with strong cash flows.

    While financial performance has been average, the realization that the stock is undervalued was behind the recent gains. The stock has solid quarterly gain of 21 percent, but that should be no deterrent to prospective investors as there is immense potential in this undervalued play. This is very much a brick and mortar business and as such, the discount of over 40 percent on the book value is very real. Considering the predictable cash flow, the stock's price by sales ratio of 0.04 is ridiculously low, and so is the forward price earnings ratio of 8.4.

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: WLFC, TA
    Aug 19 10:37 AM | Link | Comment!
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