Assessing GlobalSCAPE After Its Q4 And 2019 Numbers

Summary

• Firm reports record sales and profits in 2019.
• Share price has not gained traction as a result though.
• We assess whether the firm can continue its blistering growth rate.
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We wrote about GlobalSCAPE (NYSEMKT:GSB) early last year (April) and stated that shares (after printing a clear breakaway gap) were on the precipice of a major bullish run. We penned that piece when shares were trading around the $7.30 mark and debated whether we wanted to take on this momentum trade or not. As the technical chart shows below, shares went on a significant bull run during the past 12 months. Share price gains have recently come to a halt though despite some encouraging numbers in the recent fourth quarter as well as 2019 as a whole. The question now is whether the stock can get its mojo back. We clearly are dealing with an excellently run firm here.

For example, Robert Alpert (the newly appointed CEO) was upbeat on the recently announced fourth-quarter and 2019 annual numbers. The successful fiscal year was really cemented by the fact that management declared a whopping $3.35 special dividend at the back end of the year. Considering that shares are currently trading at $8.89 per share, that special dividend really exemplified how strongly operations are being run at present.

Top-line sales hit $3.6 million in the fourth quarter, which meant 2019 sales rose to $40.3 million. Top-line growth actually slowed below average in Q4 (13%) as full-year sales grew by 17% in 2019.

The real story though was GlobalSCAPE's growth in net profit in 2019. Net profit came in at a whopping $13.3 million compared to $3.7 million in the previous year. Management was quick to cite that net profit would have been even bigger if costs (such as the dividend and employee bonus) were taken out of the equation.

Suffice it to say, this massive growth in net profit (as well as recent sluggish share price action) has brought down the reported price to earnings ratio to just above the 13 mark. For a company growing this fast, this earnings multiple looks really attractive on the surface. Is there more to meet the eye here? Let's discuss.

Companies growing their sales at almost a 20% clip will always attract attention especially if earnings are pretty cheap. The managed file transfer industry is obviously a hot sector right now and GlobalSCAPE is taking full advantage.

The question is how long it will stay this way. Our concern would be if earnings were to drop from this level (perfectly feasible given the run-up). For example, annual net profit dropped multiple times this decade, primarily in 2012, 2014, 2016 as well as 2017. Yes, the underlying trend has been upward (confirmed by 2019 numbers), but the market doesn't seem convinced at this stage that this type of growth will continue.

The issue we would have with respect to buying GlobalSCAPE at its current earnings multiple is that we have already seen how volatile the firm's earnings can be. Just two short years ago remember, the firm reported only $1.4 million in net profit.

Therefore, we see this volatility, we like to specifically turn to the sales multiple as well as the book multiple to see if the firm's sales and assets are as cheap as the firm's earnings. Why? Because assets and sales don't tend to be as volatile as earnings. Suffice it to say, when we see companies with low assets, sales and earnings, we always double down on our research.

GlobalSCAPE shares are presently trading with a book multiple of 8.4 and a sales multiple of 3.95. These numbers are well ahead of the averages in this sector (3.28 and 2.75) as well as GlobalSCAPE's five-year averages (4.44 and 3.00) respectively.

Suffice it to say, when a company has a low P/E (relative to its averages) and high P/S, it could potentially mean that all we have seen is a temporary boost in profit margins. We state this because sales increased by 17% in 2019 whereas earnings increased by 259%. Management stated in the fourth-quarter announcement that the firm is well positioned for more growth in 2020. The first quarter should give us some insights on how much growth there really will be this year.

To sum up, GlobalSCAPE announced an impressive set of numbers in the fourth quarter which resulted in a bumper 2019 for the firm. The jury though is still out in this company with respect to future growth. Earnings may look cheap at present but the firm's sales and assets are priced well above the sector's averages at present. Let's see what the first quarter brings.

Analyst’s Disclosure: I/we 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.