GTSI Is Vastly Undervalued

Includes: GTSI, IM
by: Low Risk High Uncertainty

GTSI is a retailer of IT products and services to the US gov’t, state and local gov’ts, and other contractors. The company basically sells tech products such as routers, laptops, computers, cables, etc…It also provides services to implement these products and advises on how to optimize the tech infrastructure.

In the past, GTSI only sold tech products, but discovered that it can increase revenue by selling advice on how to best use these products (sort of the Best Buy and Geek Squad deal). Ex-CEO James Leto who pioneered the change and successfully restructured the company, retired in February. GTSI is now in the capable hands of CEO Scott Friedlander. Scotty continues to push the company towards increased profitability.

Meanwhile (or luckily for the potential investor), the investment community has not factored in the successful restructuring of the company, for the following reasons: 1) Gov’t spending remains low – but gov’t spending is rebounding after bottoming out 2) Tech product distribution remains a low margin affair – however the company has made efforts to move to higher margin areas 3) No analyst coverage – less coverage the better for the enterprising investor.

So why have I spent a couple hours of my life researching this company? Hmmmm I really like researching gov't contractors on a weekend afternoon. Actually, it's because it has great value! See the following value points:

1. GTSI has a 37% ownership interest in EyakTek (based in Alaska, provides hardware and software sales and maintenance to the gov’t). This stake is worth $8m on book (based on cost and book value) but realistically it’s worth approx. $60m = ($21m net income, or $8m GTSI’s part due to 37% stake, * PE 7.5) I use a conservative PE of 7.5 since EyakTek is privately held (but a fantastic business with growth rate of 50%+ per year). The last time I checked the market cap of the entire GTSI business was worth approx $55m.

So you as an enterprising investor, are basically getting the company for free ($55m GTSI mkt cap - $60m value EyakTek stake). Apologies, you actually are getting GTSI for less than free, based on the stake value alone.

2.Share buy-back, up to 2m shares (20% shares outstanding).

3.Excellent margin of safety,adjusted book value is $12.10, see below:

Balance sheet:

Stated Adjusted

Cash $8m $8m (100%)

Net receivables $209m $200m (95%) uncle sam
always pays

Inventory $13m $6.5m (50%)

Other current assets $6m $3m (50%)

Long Term Investments $41m $85m EyakTek & misc.

Plant & Property $11m $5.5m (50%)


Total liabilities - $192m

Shares outstanding: 9.58m (as of 2 April)

Adjusted book value: $116m or $12.10 per share

4. Gov’t spending is cyclical and bound to rise.
5. Company transitioning to higher margins products.
6. GTSI has been decreasing operating costs for the past 5 years remains and is operationally lean.

Discounting any earnings growth which is bound to occur as the economy improves, GTSI is worth at least $12.10 per share (or 100% upside at current levels of $5.55 per share).

As Ben Graham would say, the value appears to be "quite handsome".

Disclosure: Long GTSI

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