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CSP Reports Progress In Q1 With Several Catalysts

|Includes: CSP Inc. (CSPI)

CSP Inc. (NASDAQ:CSPI), a provider of IT solutions, systems integration services, and dense cluster computing systems, recently reported first quarter earnings in line with management guidance and investor expectations. But, investors should look past this quarter's lackluster earnings to both the firm's apparent discounted valuation and its upcoming catalysts.

Looking Beyond Quarterly Numbers

CSP reported revenues that declined 1% year over year to $20.9 million, thanks to a decline in its systems segment, but those figures should be set to increase soon. In its earnings press release, management indicated that it received a request for quotes for parts and expects to ship parts for five planes in the current fiscal year and receive royalties in fiscal 2014.

The company also made progress in executing its new growth strategy of cross selling its systems segment multicomputers with its services and systems integration services to become more of an end-to-end supplier to their legacy customers and reach new markets. To this end, management reported successful meetings with major customers and has already seen growth in its services and systems integration segment this quarter.

While year over year comparisons will remain difficult to break, thanks to E-2D royalties recorded in fiscal 2012, management expects the new strategy to generate sustainable growth and profitability over the long-term, as well as enhanced shareholder value.

Potentially Undervalued Opportunity

CSP has a market capitalization of approximately $22 million, which is roughly the same as its $22.55 million in shareholders' equity. For investors, this means that the stock can be acquired for roughly its liquidation value, which potentially limits its downside. And with $17.7 million in cash, investors are really buying a profitable stock for just $4.3 million.

With $17.7 million in cash and short-term investments, the company has tried to return some of this value to shareholders with a 1.55% dividend yield. Some investors haven't been satisfied with these returns, however, and at least one investor - North & Webster - initiated a proxy contest in order to replace the board of directors and ultimately pursue a sale.

On February 12th, North & Websters dropped their proxy contest in light of the company's recent statements in both a recent release and earnings conference call that following the 2013 annual meeting it will "prudently consider" and "turn to" the investors' $7.00 per share offer to acquire the company - a somewhat significant 8% premium over February 12th's market price.

Looking Ahead for Investors

Looking ahead, investors should consider a few different factors. First, the company's stock appears to be undervalued, despite its lackluster first quarter earnings. Second, this discount has been underscored by one investor's $7.00 per share offer to acquire the stock, which is currently being considered by management. And third, a failure to realize such an acquisition could lead to a temporary slump in share price, providing a new buying opportunity.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.