Kevin here's Sean Kelly's $63 answer.
Subj: Re: IARC Information Architects
Date: 99-07-20 16:29:22 EDT
From: sales@kellycapital.com (Kelly Capital)
File: IARC.xls (23040 bytes)
DL Time (28800 bps): < 1 minute
Hi Vito,
Here are some thoughts on IARC.
Management
As far as I am concerned and I am following the company for a year already, I
have high respect of Bob Gruder.
He is a clever entrepreneur. Where I was constantly disappointed was with CFO
Hollis Scott He always had the sloppiest forecast about the quarter and a
tendency to answer very inaccurately to questions. Bob in the contrary has had
tough times to go through and was always up to his word.
For example, back in June 1998, he said that he needed to do 3 to 4 acquisitions
before end 1999, he has already announced 3 and purchased them at very cheap
prices (I am convinced that 99% of investors don't know what a cheap price is). He
has diversified the company's activity very well also. In June 1998, he also told
me that he knew how
to make one of his acquisitions profitable (it was only known to me then as a
computer services firm which was loosing a bit of money and had approximately 70
million in sales). Later on we all found out this was Data Systems and that it
had 86 million in sales and losing 2 million $. Again a couple of days ago, we
saw that they actually made that company profitable. You can only be respected
when you say something and that you then deliver all your promises in record
time. I have only had good experiences with Bob Gruder.
Also the company did not overstate their earnings in Q4 1999. The internal
controllers found these errors in consolidation before they even filed the
numbers at the SEC, but unfortunately after they had issued the press release.
Not such a big problem. It doesn't reduce the value of the company, but it sure
destroys confidence. The lawsuit does not have a strong case, given that the
overstatement was only an accounting error discovered internally before these
numbers were issued to the SEC. So it is not a misrepresentation to shareholders,
legally speaking.
Sound Businesses
A quick turnaround was achieved and business is headed in the right direction. As
most investors don't know, IARC is a company which in only to 30% Y2K and to 70%
computer services and internet development. If this will finally become a reality
for investors in Q3 only according to accounting principles it is already a fact
for me since October 1998. The investor needs to view this company as a firm
producing sales of 130 million $ and not a 30 million $ firm, because it is a
mathematical certainty. The acquisitions have already been made and paid for (in
cash or stock) and need to go through the general assembly which is technically a
waste of time for the shareholder. The businesses
could have been consolidated earlier and show the real sales figure of IARC. But
as the law and SEC rules go, in the Q1 figures you will find only Y2K business,
in Q2 1999 you will find Y2K and EIP businesses and in Q3 Y2K, EIP and Data
Systems. Only after Q3 will you see the true face of IARC. In terms of sales
figures, you can see this explained
on the Excel spreadsheet attached to this page. In the yellow cells, you will find
what ALYD can consolidate and in the white cells what they could have
consolidated but needs to go through the general assembly. In terms of actual
business, the total in the red cells is what really counts. The amount of
ignorance about this among the average investor is mindboggling. The truth about
it that a simple yes vote at the assembly makes it a 130 million $ company and
not a 30 million $ company anymore.
3 Scenarios
As expressed on the Excel spreadsheet, the minimum scenario is the minimum
performance the company will show with no growth in all of their businesses. The
company will show 94.4 million in sales. The conservative scenario shows the
businesses developing at half the growth rate of their respective industries
(105.1 million $ in 1999 and 130 million $ in 2000). The aggressive scenario
gives each one of the average growth rate within their respective industries
(116.8 million $ and 181.5 million $). My realistic scenario is 73.8 and 130
million $ in sales for the 2 years to come. This makes IARC with its 500
employees and 44 salesmen a larger company than most of its competitors which are
NESY, IIXL, VIGN and BVSN. They are all losing a lot of money, so no need in
trying to value them on their earnings. Have a look at their present market
values ( NESY=325 million $, VIGN=2300 million $, BVSN=1600 million $ ). Why is
IARC valued at 36 million $ by investors? I don't care, once you know the
company's actual true value, you are ready to wait.
Breakdown Value
As a comparison NESY is at 17 times sales (sales of 19.2 million), IIXL has been
priced as an IPO and is worth 42 times sales, VIGN at 79 times sales (sales of
16.2 million) and BVSN 31 times sales (sales of 50.9 million) against an adjusted
IARC with 1051 million $ in sales. A comparative valuation would today put IARC
with a 10.2 times sales multiple (the lowest among peer group) at 1.2 billion in
market value. A stock price at 63 $ (my target) implies a valuation at 1.15
billion USD (I also use other elements to fine tune this valuation). By the way,
all this can be achieved without needing to produce a profitable bottom line, and
without needing to hype the earnings and then disappoint the investor. By
comparison, BVSN has 323 employees, NESY 77, VIGN 341 and IARC 480 (consolidated
completely). IARC has more sales and more employees than the competition.
Conclusion
Buy the stock and hold it. These type of undervaluation will not jump back to
their fair value within 1 day, but 12 to 18 months should allow you to make 30
times your money from these levels. Definitely a stock to own. It's an Internet
stock as far as I am concerned, I even had the product tested (Metaphoria).
Nobody has anything which comes close. So we need to wait now till things happen
(DSYS and Metaphoria).
I hope this answers your questions.
Cheers,
Sean Kelly
Kelly Capital
kellycapital.com |
