MTST: 10 Bagger?
Company Description
Microtest (MTST) is a micro-cap, or better yet, a micro-crap. MTST develops, markets and supports network management products and network connectivity products. It recently got out of the high end enterprise storage business and entered the networking testing and measurement arena. It's two flagship products as OMNIScanner and OMNIfiber. These are handheld devices for certifying the integrity of optical cable and its connectors. Let me stress this point: THIS IS THE ONLY AVAILABLE HANDHELD DIGITAL CABLE TESTER IN ITS CLASS .
They also have a network attached storage business, and new product (e.g., a "thin server") will be introduced in early 2000. This is the first Internet-enabled CD/DVD-ROM thin server kits designed for use in Citrix environments.
Here is their corporate homepage:
microtest.com
It was briefly a hot stock after its IPO, reaching a high of 26. Fidelity used to own a lot. Alas, it fell on hard times.
Earnings
For the third quarter ended 9/30/99, they reported revenue of 11.3 million. This represents a 18% sequential rise
and 12% year-over-year. This may sound tepid, but you will be impressed if you look beind the numbers: They discontinued an old business line in Q2 and introduced Omniscanner late in Q3, yet they experienced a 18% sequential revenue increase. IN other words, they made up for lost income and still experienced renewed growth. Earnings were 6 cents, better then the 1 analysts 3 cents (but there was a special "credit" that boosted the bottom line).
Growth Prospects
There is not much information on this company, but consider this: OMNIScanner was introduced on August 23, yet it contributed 1 million dollars to Q3!. On September 20, the company announced that OMNIScanner was the only qualified cable certificaiton tester for IBM networks. IBM also agreed to market MTST's products. The stock shot up 2 points and got as high as 5 3/4 (look at a 3 month chart and you will see) before settling down to +1/16th. Frustrating day for me, but it proved something important: This stock has explosive upside potential with the right news. Even tiny microcaps get attention quickly with the right news. The product was also approved by Lucent.
Balance sheet and valuation
Shareholder equity has gone down $5mm in the last year, but the balance sheet is still strong. MTST still trades just north of book value. Its PSR is just 0.7, way below its peers.
Other information
--Capital structure: shares outstanding = 8 million, float only 2 million!
--Institutions own 22%
--Insiders have bought 66,000 shares in the last 3 months. No insider selling at all. These were open market purchases, a good sign.
The future?
Folks, it is hard to project trends from one data point of $1mm sales for new product in one month. But the PR mentioned the first backlog they have had in a long time, and IBM did select OMNIscanner as their handheld tester of choice. But cable and network infrastructure is preceding at a breath taking pace, and these systems need to be tested. I see explosive growth for MTST products. The CD-ROM thin server is a wildcard.
MTST sells at a deep discount to its peers. Unfortunately, MTST is classified in the "computer networking" industry (such as CSCO) rather than the tests and measurements industry!
This company could sell at 10 times sales. I really feel this company can shoot the lights out. It is the kind of stock I love, in that it has more than one investment angle going for it at once: Turn-around story, value story, hot industry story, low float story. I have bought a boatload of this stock with an average of $3.75. I think it is worth a 6-9 month holding period.
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