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  • CSP Reports Progress In Q1 With Several Catalysts

    CSP Inc. (NASDAQ:CSPI), a provider of IT solutions, systems integration services, and dense cluster computing systems, recently reported first quarter earnings in line with management guidance and investor expectations. But, investors should look past this quarter's lackluster earnings to both the firm's apparent discounted valuation and its upcoming catalysts.

    Looking Beyond Quarterly Numbers

    CSP reported revenues that declined 1% year over year to $20.9 million, thanks to a decline in its systems segment, but those figures should be set to increase soon. In its earnings press release, management indicated that it received a request for quotes for parts and expects to ship parts for five planes in the current fiscal year and receive royalties in fiscal 2014.

    The company also made progress in executing its new growth strategy of cross selling its systems segment multicomputers with its services and systems integration services to become more of an end-to-end supplier to their legacy customers and reach new markets. To this end, management reported successful meetings with major customers and has already seen growth in its services and systems integration segment this quarter.

    While year over year comparisons will remain difficult to break, thanks to E-2D royalties recorded in fiscal 2012, management expects the new strategy to generate sustainable growth and profitability over the long-term, as well as enhanced shareholder value.

    Potentially Undervalued Opportunity

    CSP has a market capitalization of approximately $22 million, which is roughly the same as its $22.55 million in shareholders' equity. For investors, this means that the stock can be acquired for roughly its liquidation value, which potentially limits its downside. And with $17.7 million in cash, investors are really buying a profitable stock for just $4.3 million.

    With $17.7 million in cash and short-term investments, the company has tried to return some of this value to shareholders with a 1.55% dividend yield. Some investors haven't been satisfied with these returns, however, and at least one investor - North & Webster - initiated a proxy contest in order to replace the board of directors and ultimately pursue a sale.

    On February 12th, North & Websters dropped their proxy contest in light of the company's recent statements in both a recent release and earnings conference call that following the 2013 annual meeting it will "prudently consider" and "turn to" the investors' $7.00 per share offer to acquire the company - a somewhat significant 8% premium over February 12th's market price.

    Looking Ahead for Investors

    Looking ahead, investors should consider a few different factors. First, the company's stock appears to be undervalued, despite its lackluster first quarter earnings. Second, this discount has been underscored by one investor's $7.00 per share offer to acquire the stock, which is currently being considered by management. And third, a failure to realize such an acquisition could lead to a temporary slump in share price, providing a new buying opportunity.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: CSPI, security
    Feb 13 12:29 PM | Link | Comment!
  • Small Stock, Moderate Growth, Big Dividend, Huge End Market

    What do nearly 62% of all U.S. households own, that's usually acquired free of charge, but often costs $600 to $900 each year? The answer - pets - and it's an industry that's only growing.

    Analysts expect that U.S. households will spend some $56.5 billion per year on their pets by the end of next year, growing at a compound rate of about 4% per year. These figures are likely to continue growth, as a recent American Pet Products Association (APPA) 2011-2012 survey found that the number of households owning bets increased 2.1% to an all-time high of 72.9 million.

    Of course, investors haven't been oblivious to these trends, with publicly traded companies like PetSmart Inc. (NASDAQ:PETM) jumping more than 180% over the past five years, easily outperforming the S&P 500's dismal 8.5% return over the same timeframe. But, investors searching for the best opportunities may want to seek out potentially undervalued plays in the space.

    Small and Growing Stock

    Heska Corporation (NASDAQ:HSKA), a developer of veterinary products ranging from single-use diagnostic tests to pharmaceuticals, is a relatively unknown industry player with a modest $47 million market capitalization. But, most investors are surprised to see that the small company boasts a large 4.5% dividend yield that it recently began paying in March of 2012.

    During the third quarter of 2012, the company reported revenues that dipped 4% to $16.9 million due to lower sales of heartworm diagnostic tests, lower international cattle product sales, and lower sales under a contract with AgriLabs. However, the firm indicated that it still expects 2012 revenues to increase as compared to 2011, providing a vote of confidence.

    Gross margins also improved last quarter from 39.8% to 38.8%, thanks to a shift in product mix to relatively higher margin products, including a greater mix of high margin instrument consumables. Moving forward, the company expects these gross margins to also improve in 2012 as compared to 2011 financial results, making ongoing pricing power.

    Undervalued with a Dividend

    Perhaps more importantly, Heska's balance sheet reflects a potentially undervalued opportunity, with stockholders' equity of $48.37 million that exceeds its market capitalization and profitable operations generating stable cash flow. Investors can therefore acquire the stock at a discount to its intrinsic valuation, much less its potential growth opportunities ahead.

    When it comes to dividends, a quick look at the cash flow statement shows that they cost only $536,000 during the nine months ended September 30, 2012, suggesting that its $5.7 million in cash and positive cash flow can easily sustain the payments. Such efforts to return capital to shareholders should help improve the stock's valuation over time.

    The only potential roadblock over the long-term would be declining net income - a fear stoked by a projected decline in net income in 2012 versus 2011. But upon closer inspection, the company's bottom line is only lower due to higher selling and marketing expenses associated with growing sales force personnel that could help enhance long-term revenues.

    Other Important Considerations

    Heska appears to be an attractive investment opportunity in a growing industry, particularly with its 4.5% dividend yield and high shareholders' equity. While 2012's financial results may prove somewhat disappointing on the bottom line, most of these hits to the bottom line came from higher marketing expenses associated with the hiring of sales personnel.

    However, investors should be aware that the company's stock has a market capitalization of under $50 million, making it a micro cap stock. With average daily volume of just 9,138 shares, investors may find the stock less liquid than large cap stocks. The lower liquidity may inhibit investors' ability to buy and sell the stock at the desired time and price.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: HSKA, Pets, Medicine, PETM
    Feb 13 11:38 AM | Link | Comment!
  • Energy Telecom Looks Towards Honeywell For Profitability

    Advanced voice telecommunication and music streaming eyewear may seem like something only Skymall could sell, but Energy Telecom Inc. (OTCQB:ENRG) has identified an interesting new market for the technology that could represent a key turning point for the company - the industrial workplace. Eyeglasses are primarily worn for protection in these markets, with ongoing communication being vital with other team members.

    In early December, Honeywell International Inc.'s (NYSE:HON) Honeywell Safety Products division unveiled its UVEX AcoustiMaxx as a solution for workplace safety and communication, combining maximum protection with hands-free voice communication. The solution enables workers in remote or noisy environments to focus on the task at hand and remain protected and in contact with their teams at all times - potentially generating significant value.

    The fruits of this contract have yet to appear in the company's financial results. During the third quarter of 2012, the company reported revenues of just $17,784 and a net loss of $222,845, or about $0.03 per share. But, judging by the firm's recent letter to shareholders, the Honeywell agreement could be big. Founder Tom Rickards noted "we expect that in 2013, we will generate sustained revenues, and with careful guidance, may achieve profitability on a quarterly basis."

    Meanwhile, the company's balance sheet remains strong for a micro cap stock. With cash of $142,891 and total assets of $167,681, the firm has positive shareholders' equity of $72,538, and it only modestly expanded its share count over the prior year. The balance sheet may have also been strengthened with a new forward-looking "Zone of Safety" patent (13,713,789) that provides for new technologies never before found on the human head.

    Looking ahead towards the long-term, RedSeer Consulting estimates that the Protective Personal Equipment (PPE) market could reach nearly $16 billion by 2015, growing at a 5.8% clip between 2005 and 2015. Protective eyewear accounts for approximately 6% of this market, which yields a market niche that's expected to reach about $960 million. Capturing just a fraction of this market could product strong revenues for the company.

    Of course, there are also many risks that investors should carefully consider. Micro cap stocks tend to have less liquidity than larger stocks, meaning it may be more difficult to buy and sell the stock at reasonable prices. Meanwhile, micro cap companies also have a more difficult time obtaining financing and may have "going concern" notices attached to them by their auditors - meaning their history of losses cause doubts about their ability to remain in business.

    That said, with a market capitalization of just $4.3 million, investors won't need to capture much of the eyewear PPE market in order to see returns. Risk to investors (e.g. the "going concern" notice) could also significantly decline once the company reaches sustained profitability and dilution may also be sharply reduced. While the firm's products may seem a little strange, these events may warrant investors taking a closer second look at the stock at these levels.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Tags: HON, ENRG, long-ideas
    Feb 12 12:16 PM | Link | Comment!
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