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Why I like and own Fortress International (FIGI-1.50) shares

The company

Fortress International Group, Inc. consults, plans, designs, builds and maintains mission critical facilities, such as data centers, call centers, network operation centers, communication facilities, where security is critical and where redundant electrical, telecommunication and mechanical systems are necessary to ensure 24X7 on line availability. It offers knowledge for electrical, mechanical, telecommunications, security, fire protection and building automation systems. The services offered by the Company include technology consulting, design and engineering/planning and programming, construction management, and facilities management.

 

Investment thesis:

The company has…

 Good prospects

1.    Rapid growth in cloud computing creates…

2.    Increasing capital investments in data centers because…

3.    Aging legacy centers cannot accommodate new technology

4.    Pipeline and backlog activity rising

 Improved business model

  •       Growing importance of recurring business 
  •       Closed 2010 with 37 service agreements providing annual recurring revenues of  $6 million 
  •       Shifting revenue mix from lower margin construction management to… 
  •       Higher business  margin  facility management and consulting/engineering   
  •       Broad, diversified, blue chip customer base in both public and private sectors
  •       Reduced SG&A
  •       Better expense management
  •       Turned profitable in 2010 after many years of losses

Solid finances

  •      No bank debt
  •      $11.2 million in cash...and building

Potential for positive surprises from…

  •        Conversion of smaller scale projects into larger full-scale projects
  •        Translation of solid customer interest into contract wins

 

Takeover appeal

International energy management giant Schneider Electric ($15 billion in revenues), is on an acquisition binge. On April 5th, its latest acquisition was of Lee Technologies, a company comparable to FIGI. This acquisition confirms the growing interest, and the desirability of participation, in this space. Although no financial details of the transaction were released, based on my conversations with industry contacts and applying an estimated comparable valuation, my "guesstimate” is that FIGI could be worth over $3 a share in a buyout scenario.

    

Harris L. Berenholz, CFA