palu77

KSW, ePlus Look Like Bargains

Jeff,

Agreed you must consider all risks when developing a margin of safety and you are right to point out that they don't have a recurring revenue model. Still when developing an investment thesis it is important to consider risk vs. reward and using your assumption of a cash floor at $3.35 puts the risk at $1.65 per share. Where the reward with continue growth is ~$10/share, upside of $5. That is a sufficent risk to reward ratio for me as an investor.

So with that said, I don't care to pour into the day to day activities and know them intimately or else I would apply to work at the company. I put some level of trust into a managment team that has performed admirably to date and combine that info with a healthy balance sheet and develop my buy decision. Now it is in Mgmt's hands and all I can do is hope that my anaylsis is on target and modify as new information is revealed.

If I am wrong I sell when I realize I am wrong. If I am right I add to my postition when the time is right and wait to sell. I have owned KSW at $6/shr and my ananlysis still indicates that I am making a smart investment so I am adding to my position at this level.

Good luck to you in your investment decision.

Paul

KSW, ePlus Look Like Bargains

Jeff,

Couple of comments of KSW. Your evaluation is right on as far as I can tell. However, I disagree with you about margin of safety. They have $18MM in cash and $140MM in backlog. If that isn't margin of safety I don't know what is. Not to meantion that the backlog is not with one project.

1) I think is safe to say that the work resonably expected to be complete by the end of the year ($50MM) is safe. That will bring in an additional $2.2MM in earns this year or ($0.35/share).
2) The company has a floor of ~$2.90 based on the $18MM is cash on hand. Furthermore a majority of the $2.2MM in potential earnings for the rest of the year should go directly into the current cash holdings.

As for dividend, I wouldn't expect a quarterly dividend from KSW. They stated in their 10k that the companies dividend policy is set annually based on annual performance.

Overall if you look at is from a risk versus reward stand point. Your max risk is $2.13/share if KSW trades at cash. But even if KSW stops growing it will not trade at cash so lets say it trades at 3x's EPS(ttm) plus cash or $4.3/share or $0.70/share downside.

Your potential reward is $0.7*15 = $10.5 or $5.50/share upside, assuming a 15x's P/E on 2008 expected earnings.

That translates into a 7.8:1 Reward to Risk ratio. Not bad.

Good Luck

Paul