GSI, Intersections: Two Attractive Microcaps

by: Dan Weiss

All of the Investment Directors at Vestibula have unique attributes to our portfolio management and research strategies which allow us to offer characteristics which will be attractive to certain sets of investors. My own philosophy is to look for undervalued stocks which are typically underfollowed (many of the stocks I own have either no analyst coverage or are covered by one of two analysts) and which have some type of catalyst for value realization over the next 12-24 months. Below, I have highlighted two examples of companies in the portfolio which follow the above criteria.

1) GSI Technology (NASDAQ:GSIT) - Current Market Price- $3.75 per share.

GSI Technology was founded in San Jose, California in 1995 and had its initial public offering in March 2007. GSIT has a highly experienced management team led by Lee-Lean Shu who was one of the founders of the company after being with Sony and Advanced Micro Devices. The company is a leader in the very fast SRAM market, which is a much less commoditized and has higher margin market than the flash, DRAM or even pseudo static or slow SRAM markets.

The company's products are supplied across multiple sectors of the economy including but not limited to telecommunications, networking manufacturing, military and medical companies, with the largest customer of the company being Cisco Systems (NASDAQ:CSCO). GSIT has been profitable for nineteen consecutive quarters and business trends favor continued profitability for the foreseeable future. The company has recently introduced its next generation of power with its SigmaQuad and SigmaDDR products. These products are likely to allow the company to enter new markets such as the server market going forward. At this time, 80% of the company's revenues are from the synchronous market where the power range is from 2MB to 144MB, in which the company has its own unique offerings in certain markets such as in the 1.8V area.

The fundamentals of this company are extremely attractive. A glance at the balance sheet shows that the company has $32 million in cash and short-term investments along with an additional $27.2 million in long-term investments with only about $400K in long-term debt. The long-term investments are all 12-18 months in duration and have been put in recently as the company was looking to get a bit more yield which they could not find in very high quality short-term securities. The company has 28 million shares outstanding as of 6/30 meaning that cash and long-term investments currently equate to $2.11 per share. The company added more than $4 million to cash and long-term investments over the past quarter on strong earnings growth.

As for those earnings, the company reported $0.11 in quarterly profit on quarterly revenue of $17.3 million in the most recent quarter which compares to EPS of $0.04 and revenues of $11.3 million in the same quarter last year. Gross margins significantly improved year over year to 44.3% from 39.1%. What is driving sales is increased business with their largest customer, Cisco Systems, and the beginning of the ramp-up in their new higher margin SigmaQuad product, which will likely continue to drive increasing revenues and profitability over the next several quarters. SigmaQuad in the most recent quarter represented just over 8% of sales but is expected to increase to about 20% of sales by the end of the fiscal year (which ends in March 2009). The stock is trading at roughly 5x enterprize value/earnings on this year's expected earnings and my own estimates show earnings growing another 15% next year. Other value measures are also attractive with an Enterprize Value/EBITDA of less than 6x and an ROIC of roughly 12%.

2) Intersections (NASDAQ:INTX) - Current Share Price: $10.39.

We all are probably aware of someone who has had their identity stolen at some point as electronic commerce has increased by leaps and bounds over the past several years. Intersections is the market share leader in identity risk solutions (Identity Guard is their leading product), having an estimated greater than 30% market share of this fast growing market. Intersections' share of the market has increased over the past five years despite a highly competitive market as their products are consistently rated as the best or among the best solutions to those who worry about the potential of identity theft.

So how does this company stay on top of competitors? Thus far, it has been through offering a better product that is constantly evolving to offer more customizable options to consumers. The company is continuing to expand its offering with the most recent additions being keyboard encryption and anti keyboard logging for identity protection systems. All of their products can be bundled for a price of $14.99 per month with the bundle offering much more product offering than competitors such as LifeLock, Equifax or TrustedID.

The company reported it had 5.7 million subscribers to its services at the end of the last quarter which is approximately double what it had at the end of 2004 with revenue also more than doubling in the past four years. The company has been a strong generator of free cash flow (over $20 million in the first six months of the year) and recently reported 25 cents per share in EPS in the most recent quarter. In the company's recent conference call they guided to EPS of greater than 68 cents, revenue greater than $365 million and EBITDA greater than $47 million in 2008 with greater than 15% growth in revenues and 20% growth in EBITDA in 2009.

My own estimates are for EPS of 75-85 cents in 2008 rising to $1+ in 2009. The stock is currently trading for roughly 4x EV/EBITDA for 2008, a trailing p/e of 14 and for roughly 0.5x sales. One note is that the company announced on March 6 that its agreement with Discover (NYSE:DFS) would be ending in September, which is the reason behind the more conservative guidance for growth going forward. The company continues to have relationships with most other credit issuers - outside of American Express (NYSE:AXP) and the before mentioned Discover. 

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