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  • WPCS: Recent Developments Suggestive Of A Probable Takeover 8 comments
    Dec 5, 2013 1:16 PM | about stocks: WPCS

    Thesis

    A buyout of WPCS International (NASDAQ:WPCS) is a high-probability event in the near-term and could fetch as much as 6 to 8 times its current value based on prior buyout offers and future earnings prospects. This conclusion is predicated on a number of recent developments, including:

    (1) The CEO has alluded to a "shareholder value proposition" in the "near future."

    (2) A Wall Street legend involved in activism and M&A transactions just recently announced a 9.9% stake.

    (3) Recent appointees to the Board of Directors, including a top executive from Spherix, have extensive M&A lineage.

    (4) Multiple suitors have previously explored a buyout of the company, valuing the company at significantly higher prices.

    (5) The stars are aligned for a strategic transaction, with the CEO position currently in transition and coinciding with a significant turnaround in business.

    (6) Shares are worth significantly more than current prices under a variety of metrics.

    Additionally, if a takeover does not materialize, a well-known investor who has recently taken a significant stake in the company is likely prepared to go activist and ignite shares, just as he did with Broadvision in 2012.

    Introduction

    My mission is to discover vastly undervalued, off-the-radar companies with catalysts to drive shares significantly higher. I am exceptionally proud of the performance of the stocks I have introduced to this forum thus far. The shares of every company I have highlighted have at least doubled following publication of my articles, and all continue to trade substantially higher from when I originally recommended them. Today I am proud to reveal my highest conviction idea to date: WPCS International. I consider shares of WPCS to be deeply undervalued at current levels. More importantly, I believe an impending takeover of WPCS is a high-probability event for a multitude of reasons that I shall discuss in detail below.

    The Man with the Midas Touch

    Wall Street legend Barry Honig just recently announced a 9.99% stake in WPCS. For those unfamiliar with Mr. Honig, I will provide some background so you can appreciate the significance of this development. As a former Golden Gloves boxer, Honig has the "Midas Touch" when to comes to M&A transactions and investing opportunistically in small cap companies. Honig has been associated in various capacities with a number of M&A transactions, as detailed below. He left the venerated Ramius Capital in 2001 to co-found Marlin Capital. Honig was Co-Chairman of InterCLICK from 2007 to 2011. During his tenure the company's revenues surged from $3 million to $125 million. Yahoo ultimately purchased InterCLICK in a deal valued at $270 million. Perhaps his most memorable transaction at Marlin occurred following the InterCLICK acquisition, involving shares of Broadvision (NASDAQ:BVSN).

    Broadvision's Epic Run to $50 ... And Why WPCS May Be Next

    In September of 2011, Honig's Marlin Capital disclosed a passive 5.5 stake in Broadvision . The firm believed that shares "(did) not adequately reflect the potential value of the Company's underlying business and assets." A month later, Marlin Capital filed a 13G, having sent the company a letter "expressing its desire to acquire the Company either directly or through an acquisition." Shares of Broadvision skyrocketed in the following months, from $8.50 per share to over $56, in one of the most stunning momentum trades of the decade. If a significant share-boosting transaction does not materialize imminently, I believe Honig will likewise assume an activist role with WPCS. WPCS has one-third the float of Broadvision, and 20% of the float is short, representing over 6 days-to-cover. In the current momentum driven market, especially among speculative small-caps names, I would not rule out a "Broadvision, Part II" scenario with Honig involved. Oculus Innovative Science (NASDAQ:OCLS), Spherix (NASDAQ:SPEX), and Oxygen Biotherapeutics (OXBT) are but a few names that have gone parabolic over the past year, yet all had fewer catalysts than WPCS currently has.

    Recent Executive Commentary Strongly Suggestive of M&A

    Interim CEO Sebastian Giordano made a remark in the Q1 2014 earnings report that certainly should have caught the attention of the astute investor: namely, that the company is seeking a "shareholder value proposition in the near future." This comment, taken in conjunction with other managerial developments discussed in this article, seems indicative of an M&A transaction on the horizon as a high-probability event.

    In September, WPCS announced the appointment of Harvey Kesner to the Board of Directors. Kesner happens to be a director and former CEO of Spherix, Inc. Incidentally, during Kesner's tenure as interim CEO of Spherix, the stock went on an epic run from $5 to $28. In announcing Kesner's appointment, Interim CEO Giodano said, "Harvey brings tremendous corporate finance, restructuring, and merger experience to the table. I am confident that Harvey will make significant contributions to the Company in building value for our shareholders in the future." Given that WPCS is historically not an acquisitive company, why mention Kesner's "merger experience" in a brief announcement of a newly appointed director? This choice of words certainly caught my attention.

    Interestingly, the management team and Board of Directors of WPCS is replete with individuals boasting extensive backgrounds in mergers and acquisitions. CFO Joseph Heater, in addition to his M&A specialty as a CPA, was "involved with the due diligence and accounting integration of several acquisitions" at multi-billion dollar Airgas. Incidentally, Airgas was involved in a high-profile hostile takeover by Air Products. Director Edward Gildrea also boasts extensive experience in M&A.

    The founder and CEO of WPCS Andrew Hidalgo stepped down in July. Sebastian Giodarno assumed the role of interim CEO. No replacement CEO has been named, and no further updates have since been provided. Executives are using terms such as "shareholder value proposition" and M&A veterans are being added to the team. Where there's smoke, there's fire ...

    Prior Interest from Multiple Suitors

    WPCS has received express takeover interest from numerous parties and has received explicit buyout offers that it has rebuffed. However, the company now seems much more amenable to a reasonable offer based on the words and actions of the management team in recent months. In 2010, Riley Investment offered to acquire the company at a price of $24.50 per share (split-adjusted). The WPCS Board deemed the offer inadequate and rebuffed the proposal. More recently, Multiband explored a takeover of WPCS at $22.40 per share in June of 2011. Multiband itself was ultimately acquired for $71 million.

    Power of a Turnaround

    We are pleased to report that fiscal year 2013 was successful and a significant turnaround from the prior fiscal year. The management worked diligently to mitigate the past project losses and improve the efficiency of the organization so that we could post positive EBITDA. The company looks forward to building the momentum for fiscal year 2014.

    For its most recent quarter, WPCS reported positive EBITDA, with a backlog of $26.1 million in orders and a bid list of over $52 million in potential projects. Recent orders have come from a number of multi-billion dollar companies including Honeywell, Johnson Controls, Siemens, Convergint, and Sichuan Oil. The advanced first responder communications system at the new World Trade Center features WPCS design capability. For further insight into the turnaround occurring at WPCS, please reference here and here. Wall Street seems oblivious to the tremendous progress being made at WPCS, yet another reason I think a strategic transaction occurs that more fairly values the business.

    Just how underpriced are shares of WPCS? WPCS has a price to sales ratio of a mere .07, with little debt on the books. Valuing WPCS at a meager .5 times sales, which is extraordinarily conservative, implies a share price of approximately $20 per share, which is in the lower range of the prior bids for the company discussed above. For some comic relief, OCZ Technology Group (NASDAQ:OCZ), which recently declared bankruptcy and whose shares are worthless, has a market capitalization almost three times greater than that of WPCS.

    Conclusion

    The opportunity in shares of WPCS is as close to a "no-brainer" as one finds in the investment world. Not only are shares extraordinarily undervalued, but multiple short-term catalysts, including M&A speculation, a stake by a well-known investor, and a profitable turnaround, should help propel shares significantly higher. I envision one of two scenarios unfolding in the very near future. (1) WPCS executes on its "shareholder value proposition," as discussed above, or (2) Honig files a 13G and goes activist on WPCS, setting up a scenario similar to Broadvision in which shares have the potential to go parabolic. Either scenario should richly reward those who are positioned in shares of WPCS into the

    Disclosure: I am long WPCS.

    Stocks: WPCS
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Comments (8)
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  • Stockexpertpro
    , contributor
    Comments (50) | Send Message
     
    $WPCS Very nice find!!!
    5 Dec 2013, 02:09 PM Reply Like
  • MilesJStoner
    , contributor
    Comments (35) | Send Message
     
    honig -_-
    5 Dec 2013, 03:28 PM Reply Like
  • checkers12
    , contributor
    Comments (143) | Send Message
     
    it's all garbage...and hidalgo left, pre-takeover lol? i don't think so...this co. has always been all hype, no deliver...every six weeks or so it's another 6.2 mm in orders
    5 Dec 2013, 03:47 PM Reply Like
  • The Reluctant Fundamentalist
    , contributor
    Comments (24) | Send Message
     
    At July 31, 2013, the Company had a working capital deficiency of $3,428,074, which consisted of current assets of $15,497,773 and current liabilities of $18,925,847. However, current liabilities as presented in the condensed consolidated balance sheet at July 31, 2013 include: (1) $1,462,500 of severance liability related to the Hidalgo Separation Agreement, as further described in Note 13, “Executive Management Changes”; (2) $2,083,000 of fair value liabilities related to the Notes, which is a non-cash liability that has no impact on our operating income or cash flows; and (3) the $1,633,757 under the Zurich Forbearance Agreement.

     

    The Company's continuation as a going concern beyond the next twelve months and its ability to discharge its liabilities and commitments in the normal course of business is ultimately dependent upon the execution of its future plans, which include the following: (1) its ability to generate future operating income, reduce operating expenses and produce cash from its operating activities, which will be affected by general economic, competitive, and other factors, many of which are beyond the Company's control; (2) the repayment of, or the modification of the terms under the Zurich Forbearance Agreement; (3) the settlement of the claim with the Owner; and (4) obtaining additional funds, either through financing or sale of assets. There can be no assurance that the Company’s plans to ensure continuation as a going concern will be successful.
    5 Dec 2013, 03:52 PM Reply Like
  • GVT
    , contributor
    Comments (22) | Send Message
     
    HI,

     

    where did you get information about Honig's Marlin Capital 9.9% stake in WPCS ?

     

    Thanks!
    13 Dec 2013, 01:27 PM Reply Like
  • mr research
    , contributor
    Comments (2) | Send Message
     
    You can find it here..
    http://bit.ly/1j4aaM5
    13 Dec 2013, 04:57 PM Reply Like
  • User 17804312
    , contributor
    Comments (2) | Send Message
     
    Goldman bought 15356 shares

     

    http://bit.ly/1j4aaM5
    16 Dec 2013, 08:51 AM Reply Like
  • MagicQuote2014
    , contributor
    Comments (76) | Send Message
     
    Good, yes, I see that.
    Goldman, GRT Capital, Ancora Advisors Inc. are predatory institutions ready to go either way, and are all listed.
    Profiting from the shorting, then covering rapidly to get in less expensively.
    Sounds familar to me, like the good old days at 11 Wall St.
    Mr. Small Cap advisors, I am glad to be aboard this one with you.
    See my blogs please, Perhaps we can collaborate on some further projects. My inclination is to go very lightly, but keep my eyes on the tape.
    19 Dec 2013, 12:03 PM Reply Like
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