cBeyond: Likely to Lose Even More Money

Includes: CBEY, SPY
by: David White

cBeyond's (NASDAQ:CBEY) stock price is failing fast. The TTM net margin is already near zero. This means it is actually below zero currently (i.e. the company is losing money). It had an operating loss both of the last two quarters. The churn rate has increased from less than 1% per month to 1.5% per month (i.e. from <10% to 18% per year). It was 1.3% in the 2008 year ago quarter. This means the average retention beyond the original contract date has been shortened by almost 3 years to 2 years and 7 months. The company says the churn rate is stable now, but in this environment it could easily go to 2.0% per month (24% annualized). This would make CBEY lose even more money.

cBeyond, Inc. is a small player in a “big boy” niche. It provides managed Internet protocol-based communications services to small businesses in the United States. Its services include local and long distance voice services, broadband Internet access, mobile voice and data, email, voicemail, Web hosting, secure backup and file sharing, fax-to-email, virtual private network, and other communications and information technology (IT) services.

CBEY has sold itself to the market as a growth company. However, CBEY has not repeated its original success in its first three target areas: Atlanta, Dallas, and Denver (2000 – 2002). The company is not achieving the expected market penetration in other areas (5% at most when 11% was expected). Essentially the competitive landscape has changed dramatically since the company started. It now seems unlikely that its business plan will succeed at anywhere close to its goals, especially given the current economic conditions. There is no reason to expect that it is deserving of a 150 PE. It is currently losing money, not growing. There is no turn around in the offing. The expectations are getting worse, not better. An excellent report by Citron Research covers most of these facts (I got it from InfoNgen).

A few of the vital statistics on this stock are (most data from TD Ameritrade):

  • PE = 146
  • FPE = 97
  • P/S = 1.1
  • P/B = 2.7
  • P/CF = 8.8
  • Short Interest (Current month) = 5.9M
  • Short Interest (Previous month) = 4.1M
  • Days to cover = 7.3
  • % of float = 23%
  • Float = 25.5M
  • Shares Outstanding = 28.7M
  • Held by Institutions (MRQ) = 95%
  • Beta = 1.2
  • Total Debt = 0
  • Quick Ratio = 1.17 (this is rather poor considering CBEY has no debt)
  • EPS Growth (MRQ) = -94%
  • EPS Growth (TTM) = -86%
  • Revenue Growth (MRQ) = 22%
  • Revenue Growth (TTM) = 24%
  • Return on Equity = 2% (industry avg. = 21%)
  • Revenue per Employee = $247K (industry avg. = $543K)
  • Gross Margin (TTM) = 68%
  • Operating Margin (TTM) = 1.3%
  • Net Margin (TTM) = 0.75%

Both the CEO and CFO have been sellers recently. The only insider buying lately seems to have been at $0 or other very low price(s).

CBEY reported 1st quarter 2009 earnings of $0.00, missing the consensus estimate of the 11 analysts covering the company. This negative surprise is noteworthy because the guidance for the quarter had dropped 95.00% in the year leading up to the announcement, and yet the company was still unable to meet the number (TD Ameritrade).

In summary this company looks like a complete dog! Its guidance is unreliable. It keeps dropping. CBEY's competition has gotten bigger and tougher. Its aggressive sales tactics are still winning it clients, but it is not retaining them. It cannot succeed in this mode. Its services had not been commoditized, when it started. Now that they have been, it is having a hard time competing with the “big boys”. This is not likely to change, even after the recession ends. The revenue per employee is a telling statistic. The level of short selling is telling. The CEO and CFO insider selling is telling. With the equities markets apparently headed downward, this stock should far outperform them to the down side. The technical charting data bear these thoughts out (see below).

This daily chart of CBEY above shows a confirmed downtrend. The 20 day sma is about to cross the 200 day sma headed strongly downward. This usually means that there is significant downward movement coming in the near term. The 3 day sma is solidly below the 12 day sma. This is in turn solidly below the 20 day sma. Downtrends don’t get much stronger. There is some support at approx. $12.60. Beyond that there is no real support until approx. $9.20 (with a low of support in that area of $8.41). The recession is hurting this company along with many others. However, in this case it seems to be exposing long term systemic weaknesses, not just recession induced pains. This is a good short, even though it has come down a lot already. Going by its PE and FPE alone, one might expect this stock to drop 75% or more (I am by no means saying that will happen). It is not a market leader. It does not have an unassailable market position. It does not have huge assets like WY. It does not have far superior technology. It had an operating loss in both the Dec. and the Mar. quarters. The situation seems to be getting worse.

The Weekly chart showing the support level at approx. $9.20 is below: