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Technology Stocks : INSS - International Network Services
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To: joemjo who wrote (151)9/6/1997 9:39:00 AM
From: Dale Baker   of 446
 
Nice to see some good analysis here - good questions, Todd.

I was looking at calendar 1997. So far they have hired 133 engineers in the first six months. Let's be generous and say they can hire 150 by the end of the year. I'll also bump up the revenue per engineer to $50,000 instead of $45,000. That gives you $40 million revenue for the quarter and $3.2 million net earnings (I don't think they can shift the margins much). That's .10 per share and a 60 PE at the current price.

The deceptive thing about companies making a few cents per quarter is that they can "double" their earnings easily. Going from .03 to .06 is easier than going from .06 to .12.

Since INSS is a body shop, they are constrained by availability of new hires, their ability to provide the overhead administration, and demand for their services. To me, this points to a company with .30 to .40 earnings whose growth curve will flatten our considerably, very soon.

Let me note that the EnterprisePro product, where they could see better margins, doesn't seem like a world beater.

INSS was falling steadily until the Alex Brown upgrade. There was lots of institutional buying just afterward. At the same time, there is now a BIG gap in the chart and INSS can't seem to break its 50-day MA.

Either INSS will announce unusually good earnings next quarter (I don't know how) and Alex Brown will be right, or some of the new institutional buyers will decide to dump INSS before their quarter closes September 30 and INSS will tank again.

I regret not covering my short when INSS fell below 20. The upgrade came as a big surprise. But there would have to be a sustained breakout (not just a few days) in the high 20's on good news before I would seriously change my mind.

INSS seems like a good company doing good work. I just don't think the fundamentals support the price.

Thanks again for your questions. Good luck.

P.S. If you would like recommendations on good value stocks, click on my profile and you will see some of my holdings.
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