99-cent Store Oct 25 1999 12:00PM CST Archives...
wallstreetcity.com 11687
Networks North: Appears Undervalued Despite Drop in Earnings
by Chris Connor
Networks North {NETN} engages in the delivery of interactive video programming to customer sites, the rental and sale of equipment used in the reception of broadcast services, maintenance services and event programming for corporate clients. NETN's wholly-owned subsidiary, Magic, markets and distributes an exclusively licensed library of educational video titles to schools, school boards and Ministries of Education across Canada. Magic's wholly-owned subsidiary, Custom Video, provides video dubbing and conversion services. Another unit of the company, Interlynx, designs and develops web-based training programs, educational and corporate multimedia, CD-ROMs and web sites.
NETN appeared in the October 25th ProSearch run of Low Priced Stocks with Low Price to Book Ratios. The stock has a price to book ratio of around .69, indicating that it could be undervalued. Theoretically, investors could buy the stock at its current price of $1.97 per share and get $2.84 per share in return, were the company to liquidate all of its assets and distribute the proceeds to its shareholders.
Networks North also appears undervalued based on its amount of cash per share. As of May 31, cash comprised an impressive 47 percent of NETN's share price - this percentage translates to $1.38 per share in cash. This cash position basically means that an investor is paying only $1.05 per share for Networks North's stock, if the cash value is subtracted from the current stock price. Moreover, Networks North has a current ratio of 3.20 with minimal debt. (The company has a total debt to equity ratio of .26). A current ratio of 3.2 means that the company's current assets are valued at 3.2 times its current liabilities. Furthermore, the company sells at only 5.44 times cash flow. The company's cash flow should allow it to retire most minor debts that arise, since cash is going into the company regularly. The average company in the Broadcasting and Cable TV industry sells at around 34 times cash flow. NETN's financial health should allow it to retain a large portion of its sizable cash position over the short term.
Networks North has a history of rapidly growth. The company has grown sales 47 percent over the last 5 years while growing earnings 45 percent over the same time period. However, results for the past nine months have not been good for the company. Sales declined 5 percent while earnings dropped a miserable 94 percent. Apparently, earnings suffered from the weakened worldwide market for CD-ROMs and increased selling, general and administrative (SG&A) expenses.
Despite the increased expenses that the company has faced, it boasts an industry-beating gross margin of about 65 percent. A gross margin of 65 percent means that the company spends only 35 percent of its total revenues to make its products. The average gross margin in the Broadcasting and Cable TV industry is 49 percent. Nevertheless, interested investors may want to further research NETN's results from the last nine months. This bump in the road could be merely a short-term problem, but its source should be researched in depth. Other than the issue of increased expenses, Networks North appears to hold a good deal of speculative potential. Institutions own only about 8 percent of this relatively unknown, but profitable, company with a minuscule market cap of only $5.2 million. |
